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Anthony Hilton: Green Investors May Never Recoup Green Investments

Anthony Hilton, The London Evening Standard

The risk is that any high tariffs promised to the industry to allow them to recoup the costs of expensive green investments will be revoked, leaving the industry and its investors stranded with hopelessly uneconomic schemes.

Everyone knows that Britain needs to invest massively in the energy sector over the next 20 years.

The National Infrastructure pipeline, put together in the Treasury last year, says that of an anticipated infrastructure spending requirement of £310 billion of energy will take £176 billion. Not all of that is new electricity generation capacity — there’s some there for gas storage and carbon capture and a lot  for upgrading the transmission network — but generation remains the bulk of it.

The sums are so large partly because a lot of old plant needs to be replaced — nine out of 10 nuclear power stations (ie, all apart from Sizewell in Suffolk), plus dozens of old conventional plants and all coal-fired generation. Privatisation of the industry may have achieved many things, but the electricity price collapse of 10 years ago, when more than half the UK generating industry ended up bankrupt and in the hands of bankers, played havoc with  normal plans for plant renewal.

It is true too that economic growth  usually leads to more power consumption but the main element behind the spend is the commitment to go green and have the bulk of electricity in this country generated by wind, solar and new nuclear by 2030. That is now just 17 years away so we need to get on with it.

But at a conference on Infrastructure organised by think tank Reform and hosted yesterday by the Association of British Insurers the question repeatedly asked was, who is going to pay for all this? Only one speaker, Peter Atherton of Liberum Capital, gave a clear and succinct answer: nobody.

He thinks the whole grand energy plan is doomed, and we are heading for big trouble in not recognising this. He questions the dangerously complacent assumptions about the effectiveness of new technologies which are expected to be deployed. But much more he thinks what is being attempted is too big and much too costly to be achieved in the time available.

Atherton has done the maths but can’t get the figures to add up in any way which would deliver a happy result. Nor, for that matter, can the electricity industry which is one reason the current annual build of new capacity is only about one-90th of what will be needed by 2020. There are further signs of disquiet as Centrica now puts most of its growth investments in the US rather than UK and SSE decides to scale back drastically on spending on UK renewables.

The slow progress so far means the spending bill will be even bigger in the future. Atherton reckons that in a couple of years’ time we will need to be spending at the rate of at least £27 billion a year  to have any hope of meeting the targets for 2020 to say nothing of the targets for 2030. At present the spend is around £7 billion a year.

Where is that money going to come from? Not from the electricity companies it would appear. Though the utilities are expected by Government to make these investments, Atherton says they have neither the desire nor the money to do so.

Even if they did have the desire he says, they would be told by their shareholders to lie down in a darkened room until the feeling passed.

Shareholders have good reason to be sceptical. There is a widespread fear of being first with new technologies and with good reason. But the bigger problem is that investors have recently got very badly burned by investing in similar grand plans on the Continent. Consequently, investor portfolios are now stuffed with expensive new plant right across Europe which shows no prospect of generating a decent return and there’s no desire to repeat the experiment here.

The other problem is that no one has asked customers if they’ll be happy with much higher bills. True they have in the past when the increases were modest — for example, at present customers pay a nuclear clean-up levy. But the charges in the future when the green revolution is in full swing threaten to be massively larger than anything they have experienced before. That makes it a different game.

Future household bills could be twice as much as they are now but already there is resentment at the cost of electricity and the level of profits declared by companies. He believes when the time comes customers will rebel against the high charges and politicians will capitulate rather than stand by their promises to the electricity sector.

The risk is that any high tariffs promised to the industry to allow them to recoup the costs of these expensive investments will be revoked, leaving the industry and its investors stranded with hopelessly uneconomic plant.

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