The government has revealed ambitious new plans for the future of energy generation in Britain. But who’s going to foot the bill? Simon Wilson reports.
What has the government proposed?
Lots more wind power, mostly offshore. Energy Secretary Chris Huhne recently announced a range of measures designed to create a low-carbon, sustainable future with greater energy independence for Britain. He also set out six ‘energy pathways’ for how the energy mix might look in 2050. The most common reaction from commentators was: fine – but show us the details. Alongside all the options and reviews he announced, the clearest part of Huhne’s vision is a huge expansion of Britain’s wind turbines, especially off the east coast at Dogger Bank – a shallow area the size of Wales. Despite all the well-known objections to wind power, this is not necessarily a pie-in-the-sky proposal: with 300 turbines, Britain now leads the world in offshore wind generation. But it does raise the question of how the expansion of renewables is to be funded – a question posed last week by Neil Woodford.
Who is Neil Woodford?
One of the country’s best-known and most successful fund managers, based at Invesco Perpetual. He is particularly strong in utilities, holding more than £4.5bn of shares in firms such as National Grid, Centrica, and Scottish & Southern. He is not generally considered one of the City’s more outspoken figures; so, as David Prosser puts it in The Independent, “when he does stick his head above the parapet, it’s worth taking notice”. Last week, with his public letter to Ofgem chairman Lord Mogg, he pretty much “climbed on the top of the parapet and waved his hands about in a concerted bid to attract attention”. Essentially, what Woodford said boils down to a not-very-veiled threat.
What does he want?
He’s fed up with what he calls the “anti-equity culture” at the energy regulator Ofgem (as well as what he sees as its superfluous and “dysfunctional” water industry twin, Ofwat). He and investors like him are not going to pump money into utilities in the future until politicians buck up their ideas, clear up the confusion that surrounds future pricing policies in the industry, and allow investors to take a bigger slice of the pie. “Unless reforms to the electricity market are appropriately structured and give greater clarity… around renewable investment, we will not support this incremental investment and will seek our desired returns from rising prices in an increasingly constrained market.”
What investment does he want?
In order to meet our climate-change obligations and keep energy pumping into homes, business and factories, Britain is going to have to spend about £200bn on new energy production facilities in the next ten years. These include renewables and nuclear power, as well as traditional coal and gas-fired power plants. But energy companies don’t have that kind of money, so there are, in effect, two options: investors, in the form of rights issues or other fund-raising; or consumers, in the form of higher prices. Woodford’s message to the government is that when it comes to closing the energy funding gap, funds may not play ball.
Does anyone agree with him?
Yes. PricewaterhouseCoopers (PwC) just published an ominous report warning that a massive energy funding shortfall is developing. According to Michael Hurley, PwC’s head of energy, some £30bn of investment is needed in offshore wind farms alone if Britain is to hit its legally binding 30% renewables target by 2020. That figure dwarfs current levels of investment (£8bn a year for all the utilities and National Grid combined) and implies a deficit in capital expenditure of £10bn by 2015.
What’s the solution?
Like Woodford, PwC argues that business needs more incentives if the government target is not going to end up as a pipe dream. Currently the risks associated with offshore wind farms are deterring investment: last year less than half the average annual capacity of 1.1 gigawatts needed to meet the 2020 target was achieved. So how to encourage investment without pushing excessive costs onto consumers? PwC has various suggestions. The simplest, already adopted in parts of the United States, is a flat levy on customer bills.
What are the alternatives?
One would be to entrust a single corporate entity with the fund-raising required for offshore infrastructure, by, for example, putting it within the existing, regulated estate of National Grid. Another would be to boost the system already in place so as to reward green generation. “You may have an economic mechanism that works,” says Hurley, but you “still have to get someone to finance it.” Without that someone, the much-heralded expansion of renewables will be so much whistling in the dark.
The Holy Grail of wind power
British, US and Norwegian engineers are competing to build the Holy Grail of wind power, reports John Vidal in The Guardian. The giant, ten megawatt offshore turbines, double the size of existing models, could transform the global market through economies of scale. The leading British contender is the Aerogenerator. Its rotation mimics a spinning sycamore seed and overcomes existing weight constraints by exploiting semi-submersible oil-platform technology.
The Aerogenerator is being developed by Arup. It is working with Eden project architects Grimshaw and an academic consortium, based largely at Cranfield University, backed by big firms including Rolls-Royce, Shell and BP.