Brexit: energy security Contents

Chapter 7: Investment

Scale and sources of energy investment

115.According to RenewableUK, “The UK needs to secure over £180bn of investment in our electricity system to 2020.”198 The EU is a major source of energy investment, as Georgina Wright, Research Assistant and Co-ordinator, Europe, at Chatham House, told us: “The UK receives around €2.5 billion in energy loans and grants from the EU” each year.199 Energy UK explained:

“The EU has several routes to funding available for the energy sector offering financing opportunities worth billions of pounds, such as the European Energy Programme for Recovery, Connecting Europe Facility, Horizon 2020, Cohesion Fund or the European Investment Bank and the European Fund for Strategic Investment.”200

116.According to Centrica, “In so far as these projects help lower the costs of new generation investment and drive the uptake of energy efficiency, they have had an indirect impact on security of supply in the UK.”201 Such funding is of particular importance to the devolved nations. As Welsh Government Cabinet Secretary Lesley Griffiths AM told us, “EU funding has been, and remains, central to Welsh Government’s pursuit of low carbon energy generation, carbon reduction and economic development goals”,202 while Scottish Ministers Paul Wheelhouse MSP and Michael Russell MSP noted that “Scotland has benefited extensively from the European programmes for energy innovation and low carbon infrastructure funding”.203

117.Lawrence Slade, Chief Executive of Energy UK, told us: “If we are outside the EU, access to those funds will undoubtedly be reduced, if not totally withdrawn, depending on any future relationship.”204 On the other hand, Malcolm Keay, Senior Research Fellow at the Oxford Institute for Energy Studies, did not believe that the sums involved were particularly significant: “These are useful sums of money, but, frankly, they are not critical. They would not prevent good projects going ahead.”205 Robin McCormick, General Manager at the System Operator for Northern Ireland (SONI), echoed this view: “The vast majority of infrastructure in Northern Ireland is funded by consumers in Northern Ireland through the normal tariff process  …  [European funding] is a minority element of the investment picture.”206

118.Conversely, Energy UK warned that “unless it is possible to find some form of continuation of access, then either the sector will be exposed to greater infrastructure investment costs or the UK Government will need to find mechanisms to replace those funding streams”.207 According to the REA, “Although there are other finance streams which may be explored to fund energy infrastructure and research in the UK, including tax increases and the World Bank programmes, they are unlikely to reach the same level of funding as those from the EU.”208

119.Witnesses raised the significance of two EU funding streams in particular: the European Investment Bank and the Connecting Europe Facility (described in Boxes 5 and 6 respectively).

European Investment Bank

Box 5: European Investment Bank

The European Investment Bank (EIB) is the world’s largest multilateral borrower and lender, providing finance and expertise for sustainable investment projects that contribute to EU policy objectives. More than 90% of its loans go to Member States, with the remainder of its funding going to over 150 non-EU states. Its annual lending in 2016 was over €76 billion.

Source: European Investment Bank, ‘Some dates and figures’: [accessed 29 November 2017]

120.The British Ceramic Confederation claimed that “the most important individual source of finance for UK energy infrastructure is the European Investment Bank (EIB)”.209 According to Centrica, “Since 2000, the EIB has provided loans of more than €37bn for UK energy infrastructure.”210 The Aldersgate Group explained: “The EIB’s contribution has been significant because it can offer lower cost of capital, it has the track record of investment that ensures it has the expertise to evaluate projects and the reputation to ‘crowd-in’ private co-investors and lastly because it has large sums of money available.”211 Kirsty Hamilton, Associate Fellow at Chatham House, noted the EIB’s utility for financing “very large deals, such as offshore wind”,212 while E.ON UK commented: “As a non-commercial lender, the EIB can issue loans at lower interest rates than commercial lenders, which has proven valuable for financing projects utilising new technologies”.213

121.Welsh Cabinet Secretary Lesley Griffiths AM told us: “We strongly advocate the UK should continue to have a major role in the European Investment Bank”,214 and Energy UK recommended that the Government “examine the potential to remain an associate member” of the EIB.215 BEIS, on the other hand, stated only that “The long-term relationship between the UK and the European Investment Bank will need to be resolved in negotiations with the EU.”216

122.A number of witnesses referenced reports that “the EIB has effectively imposed a moratorium on new long term loans to the UK following Brexit”.217 However, Ian Graves, Director of European Business Development at National Grid, told us that staff at the Treasury “very much described the European Investment Bank as part of their toolkit  …  they have not seen that tool removed from their toolbox”.218 In a debate in the House of Lords on 31 October 2017, Lord Bates, Minister of State in the Department for International Development, told the House:

“Following the triggering of Article 50, the EIB took the view that it wanted to undertake an additional level of due diligence to make sure that the UK would stand by its obligations after exiting the European Union. We believe we have confirmed that position by producing our position paper on privileges and immunities. We were delighted to see that the EIB, at its September meeting, had started to approve loans again for after that period.”219

Connecting Europe Facility and Projects of Common Interest

Box 6: Connecting Europe Facility and Projects of Common Interest

The Connecting Europe Facility (CEF) is an EU funding instrument designed to promote growth, jobs and competitiveness through targeted infrastructure investment at European level. It supports the development of high performing, sustainable and efficiently interconnected trans-European networks in the fields of transport, energy and digital services. Through the CEF, a total budget of €5.35 billion is available for energy projects from 2014–20.

Projects of Common Interest (PCIs) are key infrastructure projects, especially cross-border projects, that link the energy systems of EU countries. They are intended to help the EU achieve its energy policy and climate objectives. The European Commission draws up a new list of PCIs every two years, and once selected they have access to funding from the CEF.

Source: European Commission Innovation and Networks Executive Agency, ‘Connecting Europe Facility’: [accessed 30 November 2017]; European Commission, ‘Energy: Projects of common interest’: [accessed 30 November 2017]

123.The Oxford Institute of Energy Studies noted that the European Commission had identified 195 energy infrastructure PCIs, which were “seen as essential projects for completing the European internal energy market”.220 According to New Nuclear Watch Europe:

“PCIs benefit from accelerated planning and permit granting, a single national authority for obtaining permits, improved regulatory conditions, lower administrative costs due to streamlined environmental assessment processes, increased public participation via consultations, and increased visibility to investors.”221

Alongside these non-financial benefits, National Grid informed us that PCI funding was “useful for private projects at a stage when they haven’t achieved final investment decisions”,222 while Mr Graves described it as “a vital part of our development of a project.”223

124.The REA highlighted that, through the PCI scheme, “The UK has received over €40 million for interconnector projects linking the UK to Norway and France, strengthening UK energy security”.224 SSE noted that it had particular potential to benefit energy projects in the North Sea and a pumped storage hydro scheme in Scotland,225 while Dr Owen Wilson, Chief Executive of Electricity Association of Ireland, underlined that “there are six current PCI projects affecting Northern Ireland of which two are in receipt or potentially in receipt of Connecting Europe Facility funding”.226

125.Brexit does not necessarily mean that the UK will no longer be able to participate in PCIs. As Silke Goldberg, Partner at Herbert Smith Freehills LLP, explained:

“While, technically, projects of common interest apply to connections between two Member States  …  to the extent that a projected interconnector has a positive impact on the European electricity or gas market, as the case may be, the status of PCI may be retained  …  the interconnector from Israel to Cyprus into Greece—Israel clearly is not a member of the European Union—has received project of common interest status and, as such, it is eligible for the relevant funding.”227

126.This opens up the possibility that interconnectors involving the UK and Ireland might still be regarded as PCIs post-Brexit. Dr Wilson warned, however, that an interconnector between Ireland and France “would be more likely perhaps  …  [to] receive EU funds than a GB/Republic of Ireland development.”228

127.The Minister informed us only that “the commitment made between companies and the Commission in respect of the CEF  …  [will be] honoured in the post-exit period, under the government guarantee”.229

Conclusion: scale and sources of energy investment

128.EU investment, particularly from the European Investment Bank and the Connecting Europe Facility, has been helpful in constructing and maintaining a secure energy system in the UK, in part through facilitating interconnection with other EU Member States. The UK’s ability to draw on those investment sources after it has left the EU is open to question. The Government should seek a settlement with the EU which allows it to continue to participate in transnational energy projects; it should also consider the non-financial benefits of the Projects of Common Interest scheme and how these could be replicated domestically if necessary.

Investor certainty

129.Phil Sheppard, Director of UK Systems Operation at National Grid, pointed out that “the IEM provides a stable and clear framework for investment” in the energy system.230 The Durham Energy Institute was therefore concerned that “a long drawn-out Brexit process with little clarity on the direction of energy policy will have a significant impact on investments from the private sector”.231 According to the REA, “such uncertainty could lead to a decrease in investment in energy projects and infrastructure due to the potential for increases in costs for skills, available workforce and other resources”.232

130.Statkraft set out the potential impact of uncertainty on energy security: “Instability and uncertainty around the future regulatory framework, and potential trading barriers, could increase the cost of generation and infrastructure projects and undermine their business case. This has the potential to negatively impact the UK’s energy security.”233 E.ON UK agreed: “The largest Brexit related risk to energy security is the further erosion of investor confidence.”234

131.Witnesses differed on whether this loss of investor confidence was already having an impact. Ms Hamilton believed that it had “not necessarily translated through into less overall investment activity”.235 Similarly, Chatham House told us in September 2017 that it was “too early to evaluate whether there has been an impact on UK project finance”.236

132.Energy UK, in contrast, told us: “Some parties have indicated that a risk premium on investment has appeared already due to the uncertainty on the direction of the Brexit negotiations.”237 This was endorsed by Statkraft.238 Dr Wilson stated: “I would confirm that the lack of certainty and clarity in relation to key aspects of Brexit is today impacting on investment decisions by operators in Northern Ireland.”239 Scottish Ministers Paul Wheelhouse MSP and Michael Russell MSP told us: “We believe we are now seeing the early impacts of EU Exit on forward plans for infrastructure.”240

133.In response to these threats, the CBI told us that “clear signals and frameworks are needed to encourage sufficient investment in the UK’s energy infrastructure as the UK leaves the European Union”.241 SSE agreed: “The UK Government can take action now to improve certainty and investor confidence in the UK energy system. This can be achieved by securing the outlook for policy mechanisms and tax arrangements that underpin energy investments.”242 Policies on which witnesses requested clarity included the Clean Growth Strategy,243 the Carbon Price Floor, the Capacity Market and Contracts for Difference.244 Mr Slade told us: “If you give the industry those clear commitments, it can go out and get funding.”245

Conclusion: investor certainty

134.In the absence of an overarching and enduring EU framework, the energy industry meeds to have as much certainty as possible regarding the future of UK energy policy, in order to support long-term investments in the energy system. Such investment supports energy security while keeping the cost to consumers as low as possible. The publication of the Clean Growth Strategy was a welcome step; the Government should also provide clarity regarding the future of the Carbon Price Floor, the Capacity Market and Contracts for Difference.

198 Written evidence from RenewableUK (BES0030)

199 Q 10; see also written evidence from Energy Institute (BES0028) and supplementary written evidence from Chatham House (BES0053).

200 Written evidence from Energy UK (BES0024)

201 Written evidence from Centrica (BES0031)

202 Written evidence from Welsh Government (BES0056)

203 Written evidence from Scottish Government (BES0057)

207 Written evidence from Energy UK (BES0024)

208 Written evidence from REA (BES0020)

209 Written evidence from BCC (BES0008); see also Q 10 (Georgina Wright).

210 Written evidence from Centrica (BES0031)

211 Written evidence from Aldersgate Group (BES0011); see also written evidence from Kirsty Hamilton (BES0041), E.ON UK plc (BES0046), and Q 10 (Georgina Wright).

212 Written evidence from Kirsty Hamilton (BES0041)

213 Written evidence from E.ON UK plc (BES0046)

214 Written evidence from Welsh Government (BES0056)

215 Written evidence from Energy UK (BES0024)

216 Supplementary written evidence from BEIS (BES0003)

217 Written evidence from Centrica (BES0031); see also written evidence from Aldersgate Group (BES0011) and REA (BES0020).

219 HL Deb, 31 October 2017, col 1279

220 Written evidence from Oxford Institute for Energy Studies (BES0001)

221 Written evidence from NNWE (BES0018)

222 Written evidence from National Grid (BES0043)

224 Written evidence from REA (BES0020)

225 Written evidence from SSE (BES0012)

230 Q 14; see also written evidence from NNWE (BES0018), and EEF and UK Steel (BES0027).

231 Written evidence from Durham Energy Institute (BES0013)

232 Written evidence from REA (BES0020), see also written evidence from ADBA (BES0004), Aldersgate Group (BES0011), Institution of Chemical Engineers et al (BES0023), Energy UK (BES0024), Oil & Gas UK (BES0047) and Scottish Government (BES0057), Q 12 (Lawrence Slade).

233 Written evidence from Statkraft UK Ltd (BES0026)

234 Written evidence from E.ON UK plc (BES0046)

235 Written evidence from Kirsty Hamilton (BES0041)

236 Supplementary written evidence from Chatham House (BES0053)

237 Written evidence from Energy UK (BES0024)

238 Written evidence from Statkraft UK Ltd (BES0026)

240 Written evidence from Scottish Government (BES0057)

241 Written evidence from CBI (BES0019)

242 Written evidence from SSE (BES0012)

243 We note that this has since been published: HM Government, The Clean Growth Strategy: Leading the way to a low carbon future (October 2017): [accessed 29 November 2017]

244 Written evidence from Aldersgate Group (BES0011), SSE (BES0012), Energy UK (BES0024), EDF Energy (BES0033) and E.ON UK plc (BES0046)

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