Every office has one. The guy who is always rushing around, organising meetings, drafting action plans, desperately contriving to convey an image of importance and industriousness. However, when it comes down to it he actually does very little, and even that is of poor quality.
As every day passes it looks as though the UK’s coalition government is full of such simpletons. The most bungling of all is Education Secretary Michael Gove - so desperate to prove himself a man of action that he botched his announcement on the Building Schools for the Future programme several times, and then last week was told by a High Court judge that the scrapping of the scheme was unlawful.
Unfortunately Gove’s inability to be thorough in his reforms seems to have spread to the Department of Energy and Climate, with both developers and financiers saying that its proposed ElectricityMarket Reform (EMR) will fail to attract the type of investment need to support the UK’s ambitious offshore wind plans.
One of the chief aims of the EMR is to give confidence to investors in nuclear and renewable energy so that projects are financed and built. It does this mainly by proposing penalties on carbon-intensive energy plants while at the same time putting forward a feed-in tariff (FIT) that is supposedly more stable and transparent than the existing Renewables Obligation (RO) subsidy for renewables.
At a conference at Barclays Capital’s London headquarters last week financiers and developers were critical of the reforms - one notable complaint being that the “contract for difference” FIT proposed in the EMR consultation is actually more complicated than the RO system, which is now accepted by the market despite its flaws, and that the removal of the RO means that utilities will no longer have any obligation to buy their electricity from renewable sources.
All this creates is uncertainty, which is anathema to investors these days. But above such technical concerns there is a much bigger complaint against ministers’ claims that the EMR will boost investment in the sector: that it does little to attract the “wall of money” from pension funds that the sector desperately needs.
By far and away the biggest element of the UK’s low carbon ambitions is its plan to install a further 25GW of offshore wind generating capacity by 2020.
It is now well established that there is a funding gap between what can be provided by the funding traditionally available to the renewables sector - developer equity, bank debt, utilities’ balance sheets - and what is need to meet the UK’s 2020 targets.
“I’m not sure EMR will make a difference for investors in offshore wind.”
Ernst & Young last year calculated that the UK faces a £370 billion investment shortfall over the next 15 years. This shortfall is the difference between the £50 - £80 billion of funds available from traditional sources of capital and an estimated £450 billion of low carbon investments needed by 2025.
Speaking at last week’s conference at the Barclays Capital HQ - organised by UK trade body RenewableUK - Barclays Capital power utilities and infrastructure vice president Stephen Pollock reinforced the point that bank debt - traditionally relied on to finance wind farms - will not be available in sufficient quantities.
“We see bank appetite for project finance post-Basel III diminish significantly, and exposure to single sponsor projects limited to £200-500 million,” said Pollock.
“That has an impact on offshore wind. [Debt] pricing will match funding costs for banks [i.e. become more expensive].”
So with a restricted amount of expensive bank debt available, to whom can offshore wind developers turn to finance their projects?
The E&Y report says that to plug the £370 billion funding gap, non-traditional sources of capital for the sector, such as direct institutional investors, must be attracted.
Unfortunately, Climate Change Capital renewable energy managing director Stephen Lilley said that the EMR offers little that will encourage institutional investors’ capital to pour in to the offshore wind sector.
“There’s capital there that wants to own assets with a stable yield and that are long term,” says Lilley.
“However, pension funds only like long term investments if the risk is low. I’m not sure EMR will make a difference for investors in offshore wind.”
This is because EMR does little to take away the substantial construction and operational risk that comes with investing in an offshore wind project. This is not necessarily a problem if we had the time to wait for the offshore wind market to evolve and mature so that risks can be properly understood, benchmarked and mitigated.
But with the 2020 targets fast approaching, time is a commodity in short supply.
“If we are going to meet the 2020 targets there needs to be some involvement that is more than just the EMR,” continues Lilley.
“There needs to be something put in place that addresses the technical concerns and concerns about the supply chain…maybe that’s where the Green Investment Bank (GIB) can help.”
The Green Investment Bank would help if it were able to arrange government-guaranteed bonds to finance offshore wind schemes - these would be regarded as safe investments by pension funds and the “wall of money” would doubtless flow in to the sector.
In the end it may come down to a scrap between DECC and the Treasury over which risk is greater: failing to hit renewable energy targets, or creating a government financial institution with market exposure.
One thing is for certain, however - the Electricity Market Reform will have little say in the end result.
This blog post originally appeared on John McKenna’s personal blog infrajournalist.com