UK-based energy companies who have held investor relations meetings in the US in recent weeks have encountered a bleak response. The UK energy sector, they were told, is “uninvestable”.
This is the market’s response to two months in which the certainties of the UK energy market have been undermined by politics. Given the scale of new investment required as old capacity is retired, this stark conclusion is very damaging and must be addressed by the Chancellor in his autumn statement on December 5.
There are two reasons behind the investors conclusion.
The first is the freeze on energy prices proposed by Ed Miliband six weeks ago. According to recent polling work 69 per cent of the electorate support the proposal, even if they do not understand quite what a freeze would mean. The uncertainty is about what would happen after January 1st 2017. If prices had been frozen, how could they be unfrozen? Would there be a temptation to control them on a continuing basis – creating a politically driven price regime similar to those which operate in India or France? No one knows what will happen.
The second is that the cross party consensus around the move to a low carbon economy which prevailed at the last election has been broken. The election manifestos in 2015 will say very different things. Any or all of the existing subsidies for wind, solar, biomass or nuclear could be scrapped or reduced. Again no one knows what will happen.
Until there is clarity companies and investors will sit on their money, or invest elsewhere. Shares in the sector have already fallen.
The problem is that without investment the margin of spare capacity especially in the power sector will become dangerously tight. In a meticulous paper, National Grid has shown that within two or three years that margin could, under certain assumptions, be reduced to 5 per cent. That is tight enough. Without new investment the margin could fall to two per cent in the following years.