UKERC Blog: Restoring investor confidence for low carbon power

21 Oct 2015

A blog by Rob Gross and Jim Watson

A series of energy policy changes announced since the May General Election have led to increasing concerns about political risk faced by prospective investors in the UK energy system. The CBI has voiced its concerns about the risk of policy changes undermining investor confidence and the Energy and Climate Change Committee has launched an enquiry into the topic. Most recently, several solar companies have either filed for bankruptcy or revised their plans to invest in the UK.

The government has spoken of the need to ‘reset’ policy in order to reduce costs, but it is not yet clear what this means in practice. At the time of writing the government has yet to set out a long term vision for energy policy or provided a clear indication of how or whether it will replace some of the policies it has removed.

With so much uncertainty around some commentators have argued for a fundamental ‘reset’ which may go so far as to abandon policy instruments created under the Coalition, several of which have only been in existence for two years.

We argue that a fundamental reset is unnecessary and would create delays to investment and increase political risks. Furthermore, in the search for short-term reductions of costs to consumers, it could in fact increase costs over the medium- and longer-term. Instead, the Government should move quickly to explain how it will use the tools already at its disposal to make progress with decarbonisation, reassure investors and reduce costs.

Drawing on research by UKERC and Imperial College, our new briefing paper puts forward a series of recommendations for the new government. In the paper, we argue that the government already has most of the levers it needs to encourage investment in a secure and lower carbon electricity system. Policy for investment in low carbon generation can be made more effective by providing investors with greater clarity and a longer-term perspective. This should be complemented by a renewed strategy for energy efficiency across the board, and a more neutral approach that unlocks the potential of demand side response. 

Auctions for Contracts for Difference (CfDs) for low carbon generation have already brought forward significant reductions in prices – not only for mature technologies such as solar and onshore wind, but also for newer options like offshore wind. Over the next few years, CfDs should be moved progressively to a technology neutral basis, combined with price caps to bear down further on costs. The government should therefore set out plans for how this could be implemented, including proposals for the Levy Control Framework post-2020.

The paper discusses the network infrastructure implications of new sources of energy and notes that government will need to balance the benefits of technology neutral CfD auctions against the need to develop strategic infrastructure in a timely fashion. It also discusses the impacts of variable renewables such as wind power. It explains that whilst it is important for system costs to be allocated cost effectively this does not mean that variable generators should be obliged to self-balance and invest in dedicated back up.

The paper also explains that whilst greater investment in fundamental R&D would be welcome, forthcoming UKERC research shows the timescales associated with invention, demonstration and deployment of technology are long. Whilst improvements to technologies are hugely important, the emergence of entirely new technologies remains very uncertain. Support for innovation should not be premised on wishful thinking about silver bullet technologies. Many of the technologies we need to decarbonise already exist and have done so for several decades. The challenge is to drive costs down and encourage network innovation. It is therefore vital that government maintains a clear focus on supporting demonstration and learning-by-doing of technologies that are nearer to market readiness.

Finally, the paper argues that whilst more effective carbon pricing that reflects the climate change costs of emissions is desirable and would bring many benefits, it is not a sufficient condition for significant energy system change. With respect to the power sector, regulation of emissions from existing coal fired power stations after 2025 would aid investor clarity. It would improve the prospects for investment in both low carbon and gas-fired generation. As analysis by UKERC, the Committee on Climate Change and others have shown, substantial reductions in power sector carbon emissions by 2030 is compatible with a least cost emissions reduction pathway for the UK.

Read the full paper here:

Driving innovation through continuity in UK energy policy: Four simple steps to maintain investor confidence, boost innovation and reduce costs in the UK power sector