Energy Policy Must Top the Political Agenda

Whatever the outcome of the forthcoming general election, it is clear that the next UK government will have some very difficult and stark decisions to make on UK Energy Policy.

In previous blogs, we have mentioned some of the figures reportedly required, in respect to proposed levels of investment, to deliver an effective, secure and low carbon infrastructure in the UK. But what does it all mean really, and who, ultimately is going to foot the bill for the grand sums involved?

In essence, we now rely on infrastructure mostly built in the 1970s, which needs to be replaced in the near future, regardless of any commitment to reduce carbon emissions.

One may ask why or how it got to such a late stage before a credible forward strategy was developed, but perhaps that discussion is for another day! One thing is for certain, that when one needs to do a lot of building and a lot of upgrading in a short space of time, someone somewhere has to pay for it, and as the above report pointed out; if we are to make ‘the biggest set of investments and social changes ever seen in peacetime’, it could be that the result will ‘involve significant rises in energy costs to end users’.

So does this mean that cheap energy will be categorized during the 20-teens and 2020s along with cheap credit, rampant consumerism and high social spending, as a thing of the past?

It really remains to be seen, but several interesting snippets have appeared recently, that make fascinating reading on the financial implications of the subject.

As the UK maintains a developed liberalised open market, it is assumed that (in the case of Power generation build) individual companies will come forward to build new power generation facilities in a certain regulatory framework, or will not build anything, in an uncertain regulatory framework. But does a certain regulatory framework mean a guaranteed floor on price, or significantly higher retail pricing structures in the future?

Reading Moody’s recent report on ‘European Electric utilities and the quest for debt capacity’ as well as the following Bloomberg article, suggests that something has to give somewhere. Ultimately, for unregulated markets, utility companies might not actually be able to achieve the levels of finance required for the huge investment in the coming years (even after the disposal of some existing assets such as distribution networks), without severe damage to current ratings.

If this is the case, will there really be no subsidy provided to build a new nuclear power station for example? All forward risk being placed squarely on the utility company who will have to put up with ongoing higher debt repayments and an uncertain and volatile market (and not to mention irate shareholders). Or, will the next government decide on sweeping changes to the current market? Facilitating further direct or indirect subsidy which mitigates forward risk and pleases credit agencies, but which may or may not be detrimental to retail pricing and therefore the end-user?

As I started out saying; Tough decisions ahead, and plenty at stake, so whoever ends up in number 10 and the department of energy and climate change next month, will have some huge decisions to make.