UK infrastructure investment – utilities setting the pace

Following the death knell of the collapsed Carillion, formerly one of the UK’s major infrastructure players, there has been renewed interest – and concern – about infrastructure investment. Nigel Hawkins investigates.

Whilst Carillon’s demise hogged the financial headlines, it was – in financial terms – quite a small company; but it was a leading player in the controversial private finance initiative (PFI) space.

Importantly, as the Treasury’s infrastructure pipeline document of 2016 showed, there are major projects in the five-year period between 2016/17 and 2020/21 totalling £426 billion.

Most of these projects are not financed by the PFI. Around 60 per cent of the total value is energy-related whilst much of the remainder involves transport and, specifically, Network Rail’s £7 billion annual rail improvement programme.

Within the energy sector, the c£20 billion 3,200 MW Hinkley Point C accounts for almost 5 per cent of the total cost. While it is many years late, the first concrete-pour has taken place, albeit in the power station gallery rather than for the reactor platform.

It seems inevitable that some “parked” gas-fired projects will leave the drawing-board

Whether other new nuclear plants proceed is very doubtful, given the massive costs and the munificent long-term subsidies that are being paid. But other generation projects will be undertaken even if recent investment in major gas-fired plants – Carrington excepted – has been minimal.

With all coal-fired plants planned to close by 2025, it seems inevitable that some “parked” gas-fired projects will leave the drawing-board – and eventually become reality. After all, baseload capacity is now wafer-thin and, although some existing nuclear plants may secure life extensions, the reality is that no new nuclear plants will be operational by 2025 at the very earliest.

Following the recent offshore auction for new wind capacity which produced winning bids of just £57.50/MWh compared with the inflation-linked 35-year £92.50/MWh contract for difference (CfD) for Hinkley Point C output, it seems inevitable that heavy investment will be directed towards offshore wind generation.

The UK’s largest utility is National Grid, which is valued at c£27 billion

Substantial energy investment has also been earmarked for the electricity distribution system, much of which was built in the 1950s and 1960s; hence, the system is now ripe for replacement. Its expansion is also needed, with both a far higher population and greater electricity use, boosted in part by the plethora of modern appliances.

In the RIIO-ED1 periodic review for the electricity distribution companies, various investment assumptions were made to reflect these developments. Similar comments are applicable to the gas distribution network whose ownership is now more widely dispersed compared with the days of the integrated Transco monopoly.

The UK’s largest utility is National Grid, which – despite a recent sharp fall in its share price on regulatory and political concerns – is still valued at c£27 billion. National Grid’s core UK investment equates to c£1.4 billion per year, with the lion’s share being earmarked for upgrades to the electricity transmission network.

For many years, the water and wastewater sector has been investing c£4 billion per year. This scenario seems set to continue as the ongoing periodic review is implemented, albeit with markedly lower financial returns for the companies. Part of this investment reflects new housing developments whilst much of the remainder is the familiar infrastructure renewals expenditure that has characterised the sector since privatisation.

The controversial £4.2 billion Thames Tideway Tunnel has the capacity for serious problems

Encouragingly, there have been few major delays or cost overruns. With one exception, water and wastewater projects are all relatively modest compared with constructing a large baseload power station. Nonetheless, the controversial £4.2 billion Thames Tideway Tunnel has the capacity for serious problems – it is arguably the biggest water sector project since the London ring main scheme of the late 1980s/early 1990s.

On the telecoms front, broadband investment is the major issue; in fact, much of it has already been undertaken. Nonetheless, BT still faces real challenges in honouring its pledge to rollout broadband services nation-wide at a minimum 10Mbps. Stricken by flat underlying earnings and an estimated £14 billion pension deficit, BT’s finances are under considerable strain.

Similar criteria apply to Network Rail, whose investment programme has faced serious delays and over-runs, most notably on the Great Western electrification scheme. Network Rail presents the government with real challenges given the serious under-investment for many decades; furthermore, passenger number have more than doubled over the last twenty years.

By far the most expensive scheme is the highly controversial £56 billion High Speed 2 project between London and Birmingham initially and thence to Manchester and Leeds. Assuming it proceeds, it will be a vast undertaking – and seems certain to be beset by a mix of technical, construction, political and financial problems.

In analysing where UK infrastructure investment is falling short, it is fair to identify the lack of new non-nuclear base-load plants, inadequate broadband coverage and Network Rail’s poor delivery programme, albeit in very challenging circumstances.

Despite these failings, it is self-evident that prodigious infrastructure investment is being undertaken – with the utility sector being at its core.