Britain Faces Multi-Billion Black Hole In Renewables Subsidies

Guardian screencapThe Government is facing a multi-billion pound black hole in its budget to pay for new clean energy supplies, which could result in rising household electricity bills unless there is a dramatic decline in investment in renewable technologies. Senior Whitehall sources have told The Independent that the Department of Energy and Climate Change has already overspent its budget by ¬£1.5bn to support renewable energy projects over the next five years. Unless more money can be found, key projects such as carbon capture and storage, as well as the future of new offshore wind farms, could be placed in jeopardy. –Oliver Wright, The Independent, 16 July 2015

The past few weeks have seen some seminal developments in UK energy policy, all of which have caused or might cause losses for investors in the sector. They are the latest manifestation of the on-going affordability crises in European energy policy. EU countries have embarked on one of the most extensive and expensive industrial transformation programs in history. This program is however proving to be much more expensive than originally envisaged and is being implemented in a profoundly more challenging economic environment. When European governments have been faced with the affordability crises they have, without fail, chosen to ease the pain on consumers by inflicting pain on investors. -Peter Atherton & Oliver Salvesen¸ Jefferies International, 14 July 2015

Many investors have been shocked by recent events, although they can’t really complain that there were no warning signs. Investing in a company or an asset whose economics depends upon government support/subsidy automatically carries policy risk. Investors often take a silo approach, looking at the potential returns on a particular project and comforting themselves that the legal framework around their particular investment will provide sufficient protection against policy risk. Unfortunately, experience from across Europe over the past five years shows that this approach often leads to very nasty shocks and the destruction of capital. –Peter Atherton & Oliver Salvesen, Jefferies International, 14 July 2015

Several European member states including France, Luxembourg, Malta, the Netherlands and the UK run the risk of missing their 2020 renewable energy targets, according to the latest progress report from the European Commission. Even though the UK has one of the lowest 2020 renewable energy targets of all EU member states, the UK’s share of renewable energy in its energy mix was just 5.1% in 2013, little more than one-third of its 15% by 2020 target. –Jessica Mills-Davies, The Engineer, 18 June 2015

Consumers will face higher energy bills to keep the lights on this winter as National Grid puts in place plans to ensure there is spare capacity in the system. The closure of some power stations would have left a spare capacity of just 1.2%, and the electricity company has put mothballed plants on standby and is asking some industries to be ready to power down if needed. —Press Association, 15 July 2015

Pressure is mounting on Britain’s pro-shale government to make changes to the planning system after local politicians rejected two projects that could have become Britain’s first shale gas producing wells. Prime Minister David Cameron, who has promised to go “all out for shale”, said he respected the planning process but still wanted shale gas to go ahead. His quest to replicate at least a small slice of the United States’ success in bringing down energy prices with the help of shale gas is now looking bleaker than ever. In order to save his dream, Cameron has to reform the planning system to give the government the final say in approving new projects, legal experts and industry representatives said. –Karoli Schaps and Susanna Twidale, Reuters, 15 July 2015

Shale companies will be allowed to begin fracking a year earlier than at present under government plans to allow them to test groundwater without planning permission. Ministers are expected to approve an industry request for “permitted development rights” to drill boreholes at potential extraction sites before fracking has been approved. At present, the shale gas and oil industry must obtain planning permission for water-testing boreholes, which could delay the start of fracking by up to 12 months. –Ben Webster, The Times, 15 July 2015