1Introduction
1.Investment in low-carbon electricity generation is vital in order to replace ageing energy infrastructure, maintain secure energy supplies and meet legally-binding environmental targets. The Department of Energy and Climate Change (DECC) estimates that approximately £100 billion of investment is required in electricity generation and networks by 2020.2 Energy projects like gas-fired power stations, wind farms, and nuclear power stations can take years from conception to completion. Alongside these large-scale energy projects with high up-front development costs, there are small-scale developments, including community projects and individual installations, all of which will contribute to diversifying energy generation in the UK. Investor confidence is crucial to ensuring that projects—large and small—attract and maintain investment throughout their development.
2.In July 2015, one of the first steps we took as a Committee was to consult our stakeholders on priority areas of scrutiny.3 Many stakeholders suggested that a series of DECC policy announcements (see box 1) through the summer, and a lack of clarity on the long-term direction of energy policy, had damaged investor confidence. We heard that policy uncertainty was weakening the case for investment in energy in the UK. This could mean that projects become more expensive to deliver—as investors demand a greater return on their investment to compensate for increased risk—or that projects simply do not go ahead. Moreover, any hiatus in energy investment could undermine the UK’s ability to meet climate, energy security and affordability objectives.
Box 1: DECC policy announcements
|
May 2015: Conservative Party Manifesto pledge to “halt the spread of onshore windfarms” 18 June 2015: DECC announces early closure of the Renewables Obligation (RO) for onshore wind 8 July 2015: Chancellor announces, in the Summer Budget, the removal of the Climate Change Levy (CCL) exemption for renewable electricity; Office for Budget Responsibility publishes figures on the Levy Control Framework 10 July 2015: HM Treasury productivity plan, ‘Fixing the Foundations’, announces scrapping of Zero Carbon Homes 22 July 2015: DECC announces cuts to RO for solar PV and biomass, and changes to Feed-in Tariff (FIT) accreditation 23 July 2015: DECC ends funding for the Green Deal Finance Company, effectively ending the Green Deal energy efficiency programme 27 August 2015: DECC publishes consultation on a review of the FIT scheme 8 September 2015: Impact Assessment published on closure of RO for onshore wind 9 September 2015: DECC announces decision to end pre-accreditation for new participants in the FIT 18 November 2015: The Secretary of State gives her long anticipated energy policy “reset” speech 25 November 2015: Autumn Statement and separate stock market announcement cancelling the £1 billion CCS competition 26 November 2015: The Committee on Climate Change publishes proposals for the fifth carbon budget 17 December 2015: Solar FITs decision announced |
3.On 16 September 2015, we launched our inquiry into investor confidence in the UK energy sector. We have received 95 submissions of written evidence. We began our inquiry with a public hearing on 20 October 2015 with the Minister of State, Andrea Leadsom MP, to discuss the rationale for the announcements made by DECC over the summer. Since then we have held four further evidence sessions with stakeholders involved in energy investment, including representatives of utilities, supply chain companies, banks, asset managers, pension funds and other institutional investors. We are grateful to all those who have contributed to this inquiry. We are also grateful for the assistance we received for our inquiry from our specialist advisers: Andrew Buglass and Kirsty Hamilton. We also held a separate one-off session on the unexpected cancellation in November of the £1 billion carbon capture and storage competition, and have recently published a separate report on this.4
4.The policy environment has continued to evolve throughout the course of our inquiry with further significant decisions and announcements (see box 1) that have affected investor confidence. In the light of this, and with the 2016 Budget approaching, we have been keen to present our findings at the earliest possible time. We have therefore taken the unusual step of publishing this report without formally hearing from DECC Ministers at the conclusion of our series of oral evidence sessions.
5.This report sets out our views on investor confidence. It also highlights a number of unanswered questions that the Government needs to respond to. Chapter two provides our assessment of the current state of investor confidence and sets out some of the factors contributing towards uncertainty for investors. Chapter three provides our conclusions and recommendations on the steps that should be taken to respond to concerns expressed by investors. In chapter four we look in depth at the Levy Control Framework (LCF)—Government’s tool for controlling the costs to consumers from pursuing energy policy objectives such as investment in low carbon generation—which appears to be at the root of many of our witnesses’ criticisms. We explain in further detail how to achieve greater visibility on the LCF. Finally, in chapter five we summarise our overarching conclusions. We will look carefully at the Government’s response to this report and may follow-up with further evidence sessions as appropriate.
A note on terminology
6.In this report we use the word “investors” to refer to any organisation that is providing finance of some form to the energy sector. This includes utilities, other equity investors and lenders.
Box 2: Working towards our goals
|
At the start of the 2015 Parliament we set out three goals for our scrutiny work: Holding the Government to account on achieving a balanced energy policy; Setting the agenda on an innovative future energy system; and Influencing the long-term approach to climate targets.* Our work on investor confidence in the UK energy sector and this report are primarily focussed on our goal to hold the Government to account on achieving a balanced energy policy. Timely and appropriate investments in the energy sector are crucial to the UK’s ability to meet climate, energy security and affordability objectives. Throughout the course of this Parliament, we welcome feedback on our work towards our goals. |
* Energy and Climate Change Committee, First report of Session 2015–16, Our priorities for Parliament 2015–20, HC 368, para 35-37
3 Energy and Climate Change Committee, First report of session 2015–16, Our priorities for Parliament 2015–20, HC 368
4 Energy and Climate Change Committee, Second report of session 2015–16, Future of carbon capture and storage in the UK, HC 692
© Parliamentary copyright 2015
Prepared 1 March 2016