sector watch
THE INVESTOR
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than coal so the deal made sense. Now, coal is cheap and gas is expensive;
so much so that several gas-fired plants have been closed or mothballed
because they are no longer economic to run. Energy supplies are already
falling, therefore, and are set to fall even more sharply once the coal
plants are turned off. Consumption has fallen about 10% since the
financial crisis as people have become more careful about usage, while
appliances such as boilers have become more efficient. Even so,
infrastructure investment is sorely needed to maintain security of supply,
not just now but for the next few years.
‘There was a compact in this industry. Policymakers asked the
industry to make the necessary investments for the future.And in return
they said the industry would make a reasonable return and consumers
would pay.Other European countries have already broken that compact.
Now it looks as if the UK will follow suit,’ saysAtherton.
Balance sheet
Dubbed ‘the trilemma’, the three elements of UK energy policy –
supply, renewable investment and cost control – are seen by many as conflicting.
And as household bills continue to rise, the UK’s energy sector – in particular the green
component – is coming under fire from politicians and consumers alike.
the corporate view
Of the six major energy groups in the UK, only two are listed in this country: SSE and
Centrica, which owns British Gas. However, all six need regulatory certainty if they are to make
the necessary investments in infrastructure to ensure security of supply.
‘Since the political row erupted over energy, confidence has been severely dented and major
infrastructure investment is under threat. Several firms have publicly stated they will not undertake any
big-ticket investments until after the election,’ explains RBC Capital Markets’ John Musk.
Their response is understandable. Share prices fell across the sector in the aftermath of Miliband’s
pledge to freeze energy prices, a signal from investors that they were distressed by
his speech and concerned about the outlook. ‘Investors need comfort and consistency if they are to
commit capital to this sector, and at the moment they are getting neither,’ says BenWarren,
environmental finance leader at consultancy EY.
According to Energy UK, the current environment is already affecting the country’s decarbonisation
plans. ‘The costs associated with the UK renewable programme are huge.Targets were set in a different
financial climate and, although the industry is committed to building new power stations, the
UK is currently witnessing a slowdown in the investment process,’ says Barbara Vest, director
of generation at Energy UK. ‘This may have a knock-on effect on our near-term energy mix, which could
see less slack in the system as more power stations close before new ones can be built. Of course, we
continue to use more wind, solar and nuclear energy, but at present we need coal and gas, too,
particularly when there are so many pressures on consumers.’
In other words, security of supply could be affected, unless policymakers adopt a more pragmatic
approach and give more support to coal- and gas-fired energy. Some City brokers believe that delaying
the implementation of some green commitments is not just practical, it also makes economic sense. ‘The
public is just not buying the green agenda. But if we slow the process down, it may actually work to our
benefit.We can use the time to make alternative energy like wind and nuclear more cost-efficient and
see what the rest of the world is doing,’ says Atherton.
The issue is fiendishly complex and many alternative energy supporters believe it would be ruinous
to lose momentum now.Whatever the outcome, stakeholders – including the energy companies
themselves, investors and even customers – would relish some certainty about the future; but that is
unlikely to happen before the general election at the earliest.
