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.
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