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Deja vu – the new direction in energy policy

The Government has signalled plans for a major shift in UK energy policy.

What has happened?

In a speech to the Institute of Civil Engineers, Energy Secretary Amber Rudd hinted at some substantial changes to policy, albeit with few details that might accurately inform investment decisions.

What is the current situation?

The UK’s energy infrastructure is currently split between newer, low carbon, but intermittent renewable generation, together with an estate of ageing fossil fuel power plants, and a number of planned (but delayed) nuclear facilities.

Whilst overall UK power consumption has been declining, the faster rate of retirement of generation assets has led to warnings of a power generation shortfall over the winter.

Although the UK has global expertise in the construction and operation of major power assets, a low wholesale power price, arising in part from low global oil prices, may make financing such plants much more challenging.

Over the past 10 years the attraction of investment in renewable power assets has been the level of guaranteed returns offered by public subsidy.

How does the Government see the future?

Although the Energy Secretary made clear that the Government wants to hasten the retirement of coal assets, and to encourage gas fired plant, she was equally clear that subsidies would not be available for traditional gas assets.

What is clear from the speech is that the Government sees gas fired power generation as the short term solution to the country’s energy problems.

This places the policy in a difficult position. Gas plants can be constructed relatively quickly, and would therefore offer short-term power generation security. However, it remains to be seen whether, in the absence of public support, funders will invest in projects based on current expected returns.

The key question facing the Government is how do you implement a policy that encourages the private sector to generate energy, which is low carbon, affordable, and in sufficient volumes to ensure that you retain public support, without having to write a significant number of blank cheques? This is probably one of the most difficult questions in Government at present.

How is this likely to affect the energy sector?

Based on this speech, the Government is adjusting the focus back to fossil fuels, albeit fossil fuels that are considered lower carbon than coal.

Assuming that investors can get comfortable that the Government won’t change its mind again, the Energy Secretary is hoping that there will be sufficient funders in the market with several hundred million pounds in their pockets, and who can make their financial models work to justify investment.

Whilst low oil prices will mean that the commodity costs of input gas may be lower, the capital and operating cost of the assets may not be any lower, and resulting power income will also remain low.

What does this mean for renewable energy?

Whilst not great news for the renewables market, the speech offered renewable projects olive branches in the form of confirmation that a further auction of Contracts For Difference will take place next year.

The Energy Secretary also acknowledged that more needs to be done to support heat schemes, but no further detail was provided on either of these points to enable an accurate forecast of whether this is good news for the renewable industry.

What are the next steps?

It is likely that the Treasury will have the final say on both these aspects, as statements on the RHI budget will be of particular interest to CHP and biogas developers in the Autumn Statement.

How can Ward Hadaway help?

For further information on how the changes could affect your position, or on any other aspect of the energy sector, please do not hesitate to get in touch.

Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.

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