Saturday, January 19, 2019


Michael Mackenzie wrote in yesterday’s FT (18 January) that Brexit was weighing heavily on on investment confidence in the UK.

“… one opinion has held sway among professional custodians of money for some time: steer clear of the UK.” Investors are increasingly wary of investing money in the UK economy, partly because of the dangers associated with a disorderly exit from the EU, partly because a UK not in the EU is a far less attractive proposition, and partly because of continuing chaos and uncertainty in government.

This is clearly one of the factors behind Hitachi’s decision to pause construction on the Wylfa nuclear power station in Anglesey. But another is the sheer difficulty and complexity of putting together private sector financing for massive energy projects. “Foreign companies are increasingly leery of British infrastructure projects”, according to Nick Butler, also writing in the FT. And this problem transcends Brexit, although it is certainly amplified by it.

According to FT reports (17 January) “People involved in the Wylfa project said a lack of firm financing commitments made it impossible for Hitachi to keep pumping in its own cash.” Hitachi intimated that their involvement could only continue if the project were kept off their balance sheet, limited further investment was required and there was a prospect of adequate profit. FT reporting commented that “… to meet these criteria is likely to require a significant change in the UK government’s approach to financing nuclear power.”

This is a huge blow to the government’s plans for early decarbonisation of the power sector, and hence for its contribution to internationally agreed targets for combatting climate change. It is widely argued that the costs of other renewable sources such as solar energy or offshore wind are falling sufficiently rapidly that this should not be a concern, and that these technologies are already more than competitive with nuclear power.

However, the government has also effectively killed off the Swansea Bay tidal lagoon project, a renewables energy project with the potential to overcome some of the objections to wind and solar power, that it was insufficiently predictable to provide a complete answer to the issue of supply security and reliability. Once again there is a strong suspicion that the government was unwilling to support financing arrangements that would have given this project a sufficiently low cost of capital to make it viable.

In spite of nuclear travails, it remains difficult to envisage a low carbon future without some elements of nuclear power.  “It’s difficult to see a low-carbon energy system in the future which has no new nuclear,” says George Day, the head of policy and regulation at the government-funded Energy Systems Catapult.[1]  Moreover the government has previously killed off prospects for early adoption of carbon capture and storage (CCS), another prime candidate for non-intermittent baseload power generation.

In my view there are a number of clear lessons to be learned from this debacle.

First, it is clear that almost any form of long life generation investment in the power sector represents infrastructure that will only be created when investors have a very clear policy and regulatory commitment from government. In many instances, as with the feed-in tariffs to support renewables, this will often amount to essentially a long term government guarantee. The arguments are explored more fully on another page on this site, but it is currently very difficult to point to any form of generation investment that is not supported either by long term tariff arrangements or explicit guarantees.

Second, there is clear evidence that the government’s insistence on private sector finance, and keeping the government’s involvement “off the books”, runs the danger of raising the cost of capital and also of performance failure. The Hitachi debacle may be another illustration of the weaknesses and very high capital costs exposed both in the private finance initiative and the blunders associated with the public private partnership for upgrading the London underground [2]. The risks include an impact both on cost – these are all extremely capital intensive projects, and hence on affordability. But, if not delivered, they also imperil the other energy trilemma objectives of security and sustainability.

Third, from a public policy perspective, we are reminded once again that projects that may well be essential to address fundamental concerns such as greenhouse gas emissions (GHG) and climate change, will almost always appear as “uneconomic” when there is no means for them to capture the value of full human cost of greenhouse gas emissions. Current carbon prices are nowhere near the level required, either to match the future damage those emissions will cause, or the likely cost of capturing carbon from the atmosphere, something that will almost certainly be required to meet temperature targets such as 1.5o C. Contrary to some conventional assumptions, an even higher value attaches to reducing current CO2 emissions compared to those in twenty years time. (Again this issue is explored in more detail on another page.)

Fourth, it seems impossible to escape the pernicious consequences of the Brexit traincrash, even though the energy sector might be seen as one of the least affected, at least directly, by question marks over future trade with Europe.  

Fifth and finally, and this is a challenge for my own involvement in the Oxford Martin School programme concerned with renewables, we need to focus more attention on defining, and if possible increasing, the extent to which we can meet future requirements from a combination of intermittent or variable output sources combined with storage and the management of consumer loads. Not least this could help to mitigate the failure to bring forward either carbon capture or nuclear investment in sufficiently timely fashion.

[1]Energy Systems Catapult is part of a network of world-leading centres set up by the government to transform the UK’s capability for innovation in specific sectors and help drive future economic growth. Its aim is, by taking an independent, whole energy systems view, to work with stakeholders across the energy sector (consumers, industry, academia and government) to identify innovation priorities, gaps in the market and overcome barriers to accelerating the decarbonisation of the energy system at least cost.
Catapult modelling has tended to support both nuclear power, including smaller modular nuclear technology, and carbon capture.
[2] The Blunders of our Governments, Ivor Crewe and Anthony King. 2013. Its treatment of the London underground fiasco, and the very high cost of capital incurred, is particularly scathing.

No comments: