The green stuff

Infrastructure UK, which advises the government on the country’s long-term infrastructure needs, predicts that between now and 2015, about £100bn must be invested in energy to ensure security, meet climate change objectives and deliver a low-carbon economy.

Why so much? The UK suffers from an aging energy infrastructure, has a significant nuclear decommissioning bill, an EU-driven obligation to generate 15% of UK energy from renewable sources by 2020 and a commitment to a 30% reduction in carbon emissions by the same date.

Of the money needed to deliver this, 80% is expected to come from private sources, regulatory change and new incentives, which leaves the government with a still-hefty 20%.

It has admitted that the investment is “a non-negotiable”, but where will the cash be targeted? The government’s Comprehensive Spending Review (CSR) can give us a clue.

The energy department’s allocated capital budget was increased by 41% in real terms from £1.7bn in 2010-2011 to £2.7bn in 2014-2015. While a significant chunk of this money has been allocated to nuclear decommissioning, £200m was earmarked for developing low-carbon technologies, including wind farms. The government’s commitment to investing in the low-carbon economy was also restated and figures were put against strategic targets.

The government underlined its commitment to wind, promising over £200m for manufacturing and technology

Headline commitments include plans for the UK’s first commercial carbon capture and storage facilities and the establishment and funding of a Green Investment Bank.

Renewable energy
The CSR underpins the drive to meet the UK’s renewable energy targets and confirm’s the intention to continue to support large and small-scale green technologies, including renewable heat. The current levels of feed-in tariff will allow the UK’s green industries to continue with investment, research and development in solar, wind and hydro technologies, giving a boost to the industry and allowing growth to continue, in the short term at least.

The proposed review and the degression in feed-in-tariffs is a prudent move by the government to prevent the situation seen in Spain, where the tariff set stimulated such an aggressive rate of installation that the amounts required to meet the tariffs outstripped the budget. The amount and rate of reduction in the UK will be determined by whether it is on schedule to achieve its renewable energy target of 15% by 2020. Energy developers and investors therefore have an 18-month window to capitalise on the top line rate of 29.3p/kW and an increase in installations could be seen over this period.

The government has also underlined its commitment to the wind sector. Some £60bn of private investment could be seen in the next decade for Round 2 and Round 3 wind farms and over £200m was earmarked in the CSR for manufacturing facilities at port sites and technology innovation to support development in the sector; a commitment matched in Scotland by another £70m for Scottish ports.

Onshore wind was also given a boost by the government’s proposal to allow local councils that give planning consent to be allowed to keep the revenue generated by the wind farms.
All these moves are critical to ensure the UK remains competitive in attracting turbine manufacturers and wind developers. Last month announcements were made that two major private sector firms would be investing in the UK - General Electric confirmed plans for a £100m wind turbine factory, along with Siemens’ £80m offshore project.

Renewable Heat Incentive
The Renewable Heat Incentive was also confirmed, but the detail required for investors and developers is still under consultation. The key elements to be established are:
a) The tariff for RHI technology, which will determine payback period, internal rate of return and likely investment in infrastructure and capacity
b) The technologies that make the list need to be diverse in nature and mature enough to be considered bankable
c) How the tariff “banding” for each technology by plant size will determine the size of RHI technology that can be installed, which will influence investor appetite.

Heat is the other half of the energy equation.
A network that can aid the capture and transmission of heat waste would significantly help to reduce the UK’s energy consumption, as has been seen in countries such as the Netherlands and Denmark.

Energy from Waste
An announcement came with the CSR that PFI credits would be removed from seven waste projects. Defra is experiencing a 34% reduction in capital spending and states that these
schemes will not be required to meet the 2020 landfill diversion targets. The removal of these credits may have significant effects in the procurement process if credits were crucial to the business cases, although some clients are reported still to be continuing with existing procurement negotiations.

Incentives and levies will continue to form a significant part of investment business cases. The existing Renewable Obligation Certificate scheme and proposed Renewable Heat Incentive structures will allow for greater investor confidence in the marketplace. The government backing of these schemes should have a positive effect in the adoption of certain technologies such as anaerobic digestion and gas grid injection, where previously investment may not have been financially viable. This could open up a greater opportunity for research and development to create concepts and strategies to deliver technology into the marketplace.

CRC Energy Efficiency Scheme
Under the spending review, the CRC Energy Efficiency Scheme will no longer be a system where revenue is recycled to the participants according to performance. Instead, it will function more like a traditional tax: carbon allowances must be bought direct from the government, which retains all of the revenue generated. This change is forecast to raise £3.5bn for the Treasury over the initial three years of the scheme.

For participants, the change effectively adds about 8% to energy bills for the initial phase of the CRC and the challenge will be to decrease carbon emissions across portfolios and businesses in their entirety. There are efficiencies which can be realised through streamlining operations and making strategic investments.

Nuclear
The budget for nuclear decommissioning has increased from £2bn to £2.2bn and the government’s policy fully supports the Nuclear New Build programme, which will play an important part in a future energy mix, provided there is no public subsidy for it. Good progress has been on facilitative actions, including:

• Publication of the National Policy Statement for the second round of Nuclear New Build consultations
• Announcement of the regulatory justification of two new nuclear reactor designs - Westinghouse’s AP1000 and Areva’s EPR
• More detail on what will be required from new nuclear developers in terms of clean-up.

The industry appears to have reached a consensus position that some form of additional incentive is required to allow Nuclear New Build to forge ahead. Two important consultations will hopefully bring clarity here - one on the carbon price floor and another on electricity market reform - both expected later this year.

We may also see a “dash for gas” with gas-fired power stations being developed on a smaller scale over the next 10 years; anything greater than 300MW capacity will need to have Carbon Capture and Storage (CCS) technology built in.

Carbon Capture and Storage
The implications of the CSR on mature fossil fuel technologies and the nuclear legacy were encouraging. Some £1bn has been committed by the Treasury for the development of the world’s first commercial-scale carbon capture and storage demonstration plant, strengthening the UK’s position as a world leader in cleaner fossil fuel technology.

Original plans had stated the intention for four CCS demonstration projects, but the allocated £1bn is believed to be only sufficient to support one of these project fully, so it remains to be seen how revenue is to be allocated to fund any more.

The Energy Act 2010 allows for a levy on energy bills that could raise funding for the remainder of the projects, but commentators are suggesting that the money that will now flow from the revised CRC Energy Efficiency Scheme could end up being used to support CCS.

The messages coming from the coalition since June point to a recognition that the next five years will see a different flow of energy on the networks and that transmission is going to prove key to its successful implementation. In the next five years, the National Grid will invest in greener energy infrastructure. Following a £3.2bn rights issue over the summer, it plans to spend £32bn over the next five years on upgrading the UK’s gas transmission network and integrating energy technologies such as wind, nuclear and micro-generation to the grid.

With September’s announcement from the IMF that the economy is “on the mend”, the UK’s credit rating outlook upgraded to “stable” and economic growth faster than expected in the last quarter, there are bright spots on the horizon and the energy market seems, for the moment, to be one of them.

However, with the cost of energy continuing to rise and carbon likely to come to the fore as a significant item on business’ balance sheets, behaviour at corporate and household level will almost certainly have to change.