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THE INVESTOR
sector watch
energy
Investors need
comfort and
consistency if they are
to commit capital to
this sector, and at the
moment they are
getting neither
by 2030 and the UK has also signed up to this ambition. Policymakers
have even stated that they aim to reduce greenhouse gas emissions by at
least 80%, from 1990 levels, by 2050.
These pledges are supposed to be funded by the electricity companies,
aided by their customers. Energy-efficiency schemes add around £50 to
the average household bill and the total cost of supporting renewable
energy is forecast at £2.5 billion for the year March 2013 to March
2014. Before last year’s furore, this was set to rise to more than
£7 billion by 2021.The cash is used both to subsidise alternative energy
today and invest in greener energy for the future.
‘Currently, electricity produced by conventional fuel costs around
£50 per megawatt hour. Electricity from onshore wind costs about
£100, while offshore wind costs nearer £150.These costs have come
down in recent years, but they are clearly far more expensive than
electricity generated from gas or coal,’ says O’Regan.
In other words, every time alternative energy is used to power
our homes, it is two or three times more expensive than the use
of conventional sources. In addition to subsidising these alternative
supplies, companies are also supposed to be spending billions on
investment for the future.
‘Labour’s intervention brought the crisis of affordability into the
limelight,’ says PeterAtherton, an analyst at brokerage firm Liberum
Capital.‘Politicians had hoped that the huge investment programme
they asked the private sector to complete could be done without any
extra cost to the consumer.They thought that increased energy
efficiency would compensate for the subsidies. In the long term it
might, but the problem is that the costs are being incurred before the
savings come through.’
John Musk, research analyst at investment bank RBC Capital Markets,
adds:‘Politicians have been less than honest in their rhetoric.They know
alternative energy needs to be paid for, but they also know that the
electorate does not want to be told about it.’
Voters rarely want to be told they have to pay more for something, but
they are particularly reluctant when wages are barely rising and the
overall cost of living has soared in recent years.The situation becomes
even more unwelcome if the costs were unclear in the first place.
‘Accurate communication has been sorely lacking in this industry and
explanations to date have been inadequate,’ says Mark Freshney, equity
analyst at Credit Suisse.
Ironically, UK bills are among the cheapest in Europe. German
consumers pay around 40%more than the British, while Scandinavian
costs are even higher. Supplying retail customers is not even particularly
profitable, especially compared to other divisions of big companies’
business, such as exploration and production. But this has not stopped a
massive backlash against energy bills and the green component in
particular, with politicians almost queuing up to show support for the
consumer and lob insults at the energy sector.
In many respects, this wave of discontent could not have come at
a worse time.The government has committed to close coal-fired
power plants by 2015 and replace themwith‘cleaner’ gas-fired plants.
When the commitment was made several years ago, gas was cheaper
