Investor confidence in the UK energy sector Contents

3Looking to the future

41.Chapter two explained the six factors that have combined to damage investor confidence, and why investor confidence matters. In this chapter we set out the steps Government should take to repair this damage.

Immediate actions

42.The Government needs to take immediate action to address (i) specific issues linked to Contracts-for-Difference, and (ii) the policy “cliff-edge” issue. This requires Government to set out more detail about the CfD auctions that are due to take place this decade, as well as how the Levy Control Framework is managed pre-2020. The Government must also be clear about what will happen to the existing suite of policy tools beyond 2020. In particular clarity is needed on the Levy Control Framework post-2020, and the Carbon Price Floor beyond 2020. Recommendations about the Levy Control Framework are set out in chapter four.

43.There are a number of unanswered questions that the Government needs to respond to:

i)When will there be clarification on when the three CfD auctions will take place?

ii)What budget will be available for the CfD auctions, and how far in advance of the auctions will the Government communicate this to help investors plan?

iii)Which technologies will be eligible to take part in the CfD auctions?

iv)How much must costs fall by in order for offshore wind projects to remain eligible for support under the CfD? Does this condition apply to all technologies, or just offshore wind?

v)What will happen to the Carbon Price Floor beyond 2020?

Providing a long-term vision and the pathway to achieve it

44.As we described in paragraphs 20–23, the investment community has told us it needs more clarity on the Government’s long-term vision. The “reset” speech provided a first step towards providing this (in relation to offshore wind, gas and nuclear), but further direction and detail is needed.

45.Many witnesses went on to add that the Government should also provide a strategy, which would set out the pathway to meeting its long-term objectives.61 Siemens and UKERC both argued that many of the policy tools were already available to Government, but clarity about how they would be used was lacking.62 E.ON told us that “investors need a vision of what the new Government wants to achieve and a clear direction. This must be backed up by a coherent, stable framework that investors can rely on”.63 Equitix, a Fund Manager for the Environment Agency Pension Fund, said:

DECC should lay out a clear road map for their plans across the energy sector so that investors can forecast and better understand the financial returns that ultimately contribute to the business case for continued investment into the sector.64

46.Some witnesses told us that the UK’s 2050 carbon reduction target combined with the carbon budgets were a helpful guide to the direction of travel.65 Vattenfall UK explained how they might be used to boost investor confidence:

The Carbon Budgets are one tool that provides investors with a clear map to least cost decarbonisation. To ensure they continue to provide this long term visibility and confidence, Government must set out a clear plan for delivery and proposed mitigation should the power, heat or transport sectors fall behind in their planned contribution to future Carbon Budgets.66

47.The Government is currently in the process of setting the fifth carbon budget, which will cover the period 2028–32. The budget must be formally set by Parliament through secondary legislation by June 2016. As soon as is reasonably practicable after setting the carbon budget, the Secretary of State must lay before Parliament a report setting out proposals and policies for meeting the carbon budgets for the current and future budgetary periods up to and including that period.67 In 2011, after the fourth carbon budget was set, the then Secretary of State presented this report as Government’s “Carbon Plan”.68

48.The “Carbon Plan” for achieving the fifth carbon budget represents an ideal opportunity for rebuilding confidence in the direction of travel for the energy sector in the UK. We have identified five key principles that the Government should follow as it develops the Plan over the course of 2016:

i)The Plan must be developed in full consultation with the investment community.

It will not be possible to meet our long-term climate change targets without significant levels of investment in energy infrastructure. It is essential that DECC understands investors’ needs as it develops the Plan.

ii)Any modelling or scenario work on the future energy mix that is carried out needs to be transparent and open to external scrutiny.

Investors need to feel confident that the methodology used is robust and where appropriate, have the opportunity to contribute.

iii)The Plan should provide more clarity about how transitions will be managed as new technologies become established, including the intended “glide path” out of subsidies.69

Subsidies are not intended to last forever and it is right that support reduces as technology costs fall. However, this needs to be done in a consistent, transparent and controlled manner which can be clearly understood by investors and factored into their investment plans—which require long-term assessments to be made. This would both provide the appropriate downward pressure on subsidy levels, while mitigating investor concern about sudden, unexpected policy changes. In view of regulatory changes likely to be required as the regulatory framework evolves in response to changing power sector business models, it is critical that amendments to regulation are consulted on and introduced in a similarly transparent, predictable fashion.

iv)The Plan needs to retain sufficient flexibility to adapt to new technologies and innovations such as storage and demand-side response.

v)The Government should take steps to build a cross-party consensus around the Plan.

49.There are a number of unanswered questions that the Government needs to respond to:

i)What consultations or engagement activities does DECC intend to conduct as part of the process of developing the Carbon Plan for the fifth carbon budget, and when will these activities take place?

ii)What modelling and/or scenario work will DECC be commissioning to inform the Carbon Plan?

iii)How will DECC factor in uncertainty around the role that new and emerging technologies (such as storage and demand-side measures) might play in the future energy mix as it develops the next Carbon Plan?

iv)What plans does DECC have to provide forewarning of decisions affecting the supply chain and what support will be provided to maintain jobs in the energy sector?

Improving understanding of investor impacts

50.So much in energy and climate change policy depends on what investors do, including how, when and where they invest. It is therefore crucial that the Government improves cross-Whitehall understanding of investors’ perspectives and the impacts of its policies and decision-making process on the investor community.

51.We recommend that Government develops its in-house capacity to analyse the consequences of its policies on investment (to the extent policy is expected to impact investment decision). Government should develop a complementary process to Economic Impact Assessments whereby the consequences for investment are assessed for all new policies.

The institutional landscape

52.The Government is currently in the process of establishing a National Infrastructure Commission (NIC), which will be “an independent body that enables long term strategic decision making to build effective and efficient infrastructure for the UK”.70 It will have a remit to look at energy as part of this. Several witnesses welcomed this move and noted that there could be a role for the NIC to play in providing greater clarity and certainty about the long-term direction of travel. Centrica said:

We welcome [ … ] the recent announcement of a National Infrastructure Commission (NIC) to assess the UK’s infrastructure’s needs in a dispassionate and even-handed manner. Providing long term certainty is critical for ensuring investment in major and expensive infrastructure.71

Vattenfall UK said:

There is potentially a role for the recently announced National Infrastructure Commission to gather evidence to prepare an agreement or ‘roadmap’ for the decarbonisation of the electricity sector.72

53.There is an important question about how the National Infrastructure Commission, Committee on Climate Change, Ofgem, Infrastructure and Project Authority, and Office for Budget Responsibility will work together.

54.We note that HM Treasury is currently consulting on the governance, structure and operation of the National Infrastructure Commission (NIC). We recommend that the NIC has an explicit requirement to consider the infrastructure requirements of meeting the UK’s carbon budgets and long-term legally binding carbon reduction targets.

55.The Government needs to explain exactly how DECC Ministers and officials intend to liaise with the newly-created National Infrastructure Commission (NIC), in particular in relation to the work which the NIC intends to commission on key aspects of energy sector investment.

61 Renewable Energy Association (ICE 0066), Electricity Storage Network (ICE 0018), Centrica (ICE 0059), RWE (ICE 0067), Association for the Conservation of Energy (ICE 0039), Hallidays Hydropower Ltd (ICE 0037), Environment Agency Pension Fund (ICE 0098), Scottish Renewables (ICE 0050), SSE (ICE 0013), UKSIF (ICE 0028), E.ON (ICE 0036), Green Switch Solutions (ICE 0044), Siemens (ICE 0076), Tempus Energy Supply Ltd (ICE 0072), Vattenfall UK (ICE 0094), EnergyUK (ICE 0086), Sustainable Energy Association (ICE 0052)

62 Siemens (ICE 0076), UKERC (ICE 0073)

63 E.ON (ICE 0036)

64 Environment Agency Pension Fund (ICE 0098)

65 Centrica (ICE 0059), E.ON (ICE 0036)

66 Vattenfall UK (ICE 0094)

67 Climate Change Act 2008, Section 14

68 HM Government, The Carbon Plan: Delivering our Low Carbon Future, 1 December 2011

69 TGE Group (ICE 0010), Sustainability First (ICE 0016), RenewableUK (ICE 0095), E.ON (ICE 0036)

70 National Infrastructure Commission, accessed 23 February 2016

71 Centrica (ICE 0059)

72 Vattenfall UK (ICE 0094)

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Prepared 1 March 2016