Over the course of summer 2015, the Government made a series of policy announcements, which appeared to signal a significant change of direction on low-carbon energy policy. The changes took many stakeholders by surprise and raised serious questions about the Government’s plans for meeting long-term carbon objectives. Given that great pains have been taken in recent years to take account of investors’ need for policy stability and predictability, it was not surprising that stakeholders identified investor confidence in the UK energy system as a priority area for us to investigate.
We found that the Government’s actions have clearly had an impact on the confidence of many investors. While the effect is not as great as has been experienced in some other countries—where the implementation of retroactive policies has caused investment to collapse—there nevertheless has been a dip in confidence since the election in May 2015. This is most clearly illustrated by the UK’s position in the EY Renewable Energy Country Attractiveness Index, which fell from 8th place in June 2015 to 11th place in September 2015.
We identified six factors that have combined to damage investor confidence:
(1)Sudden and numerous policy announcements have marred the UK’s reputation for stable and predictable policy development.
(2)A lack of transparency in the decision-making process has led investors to question the Government’s rationale for policy changes and to wonder “what will be next?”
(3)There has been insufficient consideration of investor impacts, exemplified by insufficient consultation and engagement ahead of policy decisions.
(4)Policy inconsistency and contradictory approaches have sent mixed messages to the investment community about the direction of travel. Examples of this include:
(5)The lack of a long-term vision has made it more difficult for investment committees to make decisions about projects that are, by their nature, long-term endeavours.
(6)A policy “cliff-edge” in 2020, does not provide sufficient visibility about the size of the future Levy Control Framework (LCF) budget or what will happen to the Carbon Price Floor. This is a problem when projects can take five years or longer to go from conception to completion.
The good news is that there is no shortage of money available for projects that have advanced to the late construction or operation phase. Institutional investors in particular favour these kinds of investments. However, the problem occurs earlier in the project pipeline where there is some anecdotal evidence of a pause in investment in the supply chain and development of new projects. If investment in these activities has indeed dried up, it may not become apparent until the end of the decade.
Given the scale of investment that is needed in our energy infrastructure (DECC estimates £100 billion by 2020), it is of course unhelpful that progress may have been slowed, but we are hopeful that—if the Government is willing to learn from its mistakes—things can now begin to move in a more positive direction.
The first task that Government must address is to provide more clarity about how existing policy mechanisms will be used. Despite repeated promises to provide plans and clarity, the Government has yet to set out detailed information about what will happen to the Levy Control Framework beyond 2020 or to provide satisfactory plans for the rounds of Contract-for-Difference auctions (merely stating that there may be three auctions this Parliament does not constitute a “plan”).
Next, the Government must turn its attention to creating a credible long-term vision for the future of the UK’s energy system. The process of developing a “Carbon Plan” to deliver the fifth carbon budget presents an ideal opportunity for the Government to build a shared vision of the direction of travel. If it is to successfully repair investor confidence, the Government should adopt the following five principles in developing the Plan:
(1)develop the Plan in full consultation with the investment community;
(2)ensure that any modelling or scenario work is transparent and open to external scrutiny;
(3)provide more clarity about how transitions will be managed, including the intended “glide path” out of subsidies;
(4)retain sufficient flexibility to adapt to new technologies and innovations such as storage and demand-side response; and
(5)take steps to build a cross-party consensus around the Plan.
Finally, the Government needs to pay particular attention to the LCF, which seems to be at the root of many of the recent policy alterations. The LCF appears to now have a central role in driving the direction of energy policy. A projected overspend in the budget—and the impact this might have on consumer bills—was the trigger for the recent round of policy announcements. However, we are concerned that the Government appears to be considering only short-term costs to consumers. The Government also has a responsibility to consider the impact of its decisions on the next generation of consumers. Many stakeholders considered that the LCF was far from perfect. In particular the failure to take a holistic view of whole system costs and the lack of transparency about how the spending forecasts are calculated are causing some nervousness. The assumptions that underpin the forecasts need to be made public as soon as possible.
1 EY , accessed 23 February 2016
Prepared 1 March 2016