The utopian policy view of the UK power market is that in the future there could be potentially thousands of generators connected to the distribution networks at scales varying from domestic solar panels to large wind farms. Energy demand could also evolve and increase through the electrification of the transport and heating sectors.
The cost of building this new power infrastructure in the UK could be over £110bn by 2020. Of this, about £70-75bn is likely to be invested in new generation capacity and the remainder in the electricity networks. Moreover, energy utilities could also face additional financing requirements associated with the roll out of smart meters, gas transmission and renewable heat policies. Overall the investment challenge could amount to over £200bn.
However, the UK is not the only country with investment needs of this scale. Driven by the same EU Energy policies and the recent decision to rescind nuclear, by 2020 Germany wants to have cut greenhouse gas emissions by 40%, doubled renewable generation to supply 35% of electricity and cut primary energy consumption by 20%. Research from the KfW Bankegruppe, put the total investment required for this at €239-262 billion (£208-228 billion).
The UK Government understands that the current electricity market cannot attract either new entrants or their vital development capital without major changes. On the 16th of December 2010 the Department of Energy & Climate Change (DECC), supported by the UK Treasury, announced their Electricity Market Reform (EMR) Proposals with the aim on decarbonising the GB’s electricity system. This document outlined the most radical changes to the power industry in 25 years.
The latest capacity market EMR consultation produced in July notes that the current energy companies do not have the financial resources to make anywhere near this level of investment, as do key players such as Scottish & Southern in their spring White paper. Furthermore, the future financial regulatory proposals also means that banks will have less capital to invest across Europe as competing countries look for investment capital but against an increasing level of risk.
So how do we prevent investment failure, failing firms and end customers? We use our leadership skills, humble ourselves, consider the bigger investment picture. We set our investment budget to within our balance-sheet constraints, prioritise our investment, work hard at getting the costs of technology down and supporting the supply chain. We need to keep power affordable to end customers. It’s housekeeping and common sense, or is that not fashionable enough for the utopian view?
Written by Aily Armour-Biggs, Global Energy Advisory CEO