National power supplies and politics have long been awkward bedfellows. Governed by some of the strictest carbon and pricing regulations in the world, the UK energy industry is highly sensitive to political change. Aware of this, and of the growing need to create a cohesive plan for the country’s energy future, the government has spent the past two years debating the best way to enable the estimated £110-billion investment that is needed for new energy infrastructure for the nation.
As a result, the UK’s new Energy Act gained Royal Assent last December. This legislation brings about wholesale reforms to the way in which energy assets are built and subsidised, and their power sold. A key aim of the new regime is to provide certainty and stability to investors so that they can have faith that the new nuclear stations, solar farms and gas plants they build will remain financially secure throughout their lifetimes.
For the energy industry, such reassurance cannot come soon enough. The UK currently offers a somewhat complex and confusing environment for the development of new power assets. Existing gas-fired generators are being mothballed, due to tumbling coal prices from across the Atlantic making older, dirtier forms of power more economic.
However, these ageing power stalwarts, the UK’s coal plants, are also systemically being shut down to meet EU carbon regulations. New renewables projects are also being scaled back or abandoned as developers await more regulatory security from the state.
The new legislation must help to close this growing gap between the existing power plants, which have reached the end of their life cycles, and the construction of a new mix of nuclear, gas-fired and renewables projects that the government hopes will overtake them.
The lynchpin of the Act is the Electricity Market Review, which includes a package of new state support mechanisms designed to guarantee power producers a stable, predictable price for the energy they produce. If producers can guarantee returns for their investments, then power project development should increase, goes the logic. A huge part of effectively planning and managing physical assets is ensuring that they present an attractive bet for investors. Ease of use and clarity will be key to the success of power-market reforms.
The new Energy Act can be made to work and give much-needed certainty to underpin investments
Global head of law firm Hogan Lovells’ infrastructure practice Adrian Walker says: “The new Energy Act can be made to work and give much-needed certainty to underpin investments. Of course, utilities will be at the heart of developing many of the new assets. But the government’s success is going to be judged by how good it is at fostering speed and value for money. This tends to come down to how simple and scalable you can make things, and whether you give investors long-term certainty.”
The prize for making the UK’s new Energy Act a success is a healthy, thriving energy market. “When you get regulated markets right, the investors come running,” says Mr Walker. “If you tinker for short-term political reasons, there tends to be a price to pay.” As advisory firm Energised Environments’ Jonny Clark has warned: “The UK supply chain could go anywhere in the world. If investment is flowing elsewhere, because it’s easier to do business, then that’s where the supply chain will go.”
A European Commission investigation into elements of the Electricity Market Review is ongoing. If the commission decides that the system does not provide the UK taxpayer with good value for money, then it may well be back to the drawing board for policymakers. The key concern that arises out of the regulatory rollercoaster that the industry has already been subjected to, by the creation of a new electricity market, is how this will affect the flow of capital into new energy projects in the UK.
According to Scottish and Southern Energy’s head of policy Dr Keith MacLean: “We now have a whole series of known unknowns that have been created… people want to have information to present to their investment committees before they can take projects forward. It’s a very brave investor that goes ahead thinking they know what the outcome is going to be in a very complicated jigsaw puzzle. At the moment we barely have an outline of the corner pieces.”
Such scrutiny is to be expected, however, and secondary legislation is set to be added to the Act, which may answer some of the concerns raised by industry. Rising tensions in Russia and Ukraine have added further impetus to ensure the UK has a solid plan to develop its own secure, independent sources of energy. As ever, politics looks set to be the driving force behind power development for a long while yet and the UK’s new landscape for energy development will be predicated on laws that can be relied upon.
CASE STUDY
NUCLEAR COMEBACK AT HINKLEY
The planned Hinkley Point C nuclear plant will be a physical asset of massive importance to the nation. The first civil nuclear power station to be built in the UK for two decades, the project will galvanise billions of pounds of investment and mobilise a large part of the construction supply chain.
Developed by French utility giant EDF Energy, this £16-billion undertaking will be reliant upon strong asset management. The project demands decades of funding, both from the developer, lenders and the state, and ensuring that the new nuclear power station is built in the most cost-effective and risk-mitigated manner possible will be key to keeping the UK public on side.
Part of reducing risk is ensuring that Hinkley Point C is built on time and on budget. For a project of such national – and international – significance, having the correct frameworks in place will be essential for EDF’s undertaking to be a success.
After decades of no development and despite the challenges, the time for new nuclear, it seems, is now
These frameworks span regulation, finance, construction, maintenance and decommissioning. And nuclear safety will be a key concern. Legal firm Norton Rose’s nuclear lead Peter Hall says: “Post Fukushima, the industry took a long hard look at safety issues and that meant the introduction of further safeguards, which costs money. But if the result is increased safety, that can only be a good thing.”
As one of the biggest civil engineering projects in the UK in decades – on a par with Crossrail and the Olympic Park – the new nuclear station also requires a robust, skilled supply chain that can meet the demands of constructing such a complex asset.
The first generation of UK nuclear professionals is now reaching retirement age, but as Mr Hall points out, the UK still has a strong reputation for nuclear development. “We exported our expertise during UK nuclear’s dormant years. The challenge for Hinkley Point C is to ensure that UK plc gets its fair share of the work that is available,” he says.
Beyond construction, asset management spans the lifetime of a reactor. At the end of the nuclear energy production life cycle comes the thorny issue of radioactive waste storage. The government has been trying to find a county willing to host an underground disposal facility for several years. Cumbria County Council has been the latest to refuse, withdrawing from the process last year. At the time, Energy Minister Ed Davey warned that it is “absolutely vital that we get to grips with our national nuclear legacy – the issue has been kicked into the long-grass for far too long”.
That said, public and political consensus is at a high for the technology. With energy demand only set to increase and as European Union legislation forces exisiting, high-carbon power plants to shut down across the country, there is a pressing need for a reliable baseload power project that can be relied upon to keep the lights on.
Hinkley Point C now awaits approvals both from the European Commission and a final investment decision from EDF, both slated for this summer. After decades of no development and despite the challenges, the time for new nuclear, it seems, is now.
EDF is positive that the addition of this mammoth project to the UK’s stable of generating assets can only bolster the country’s recovery efforts post-economic crisis. “It has the potential to help rebuild the country’s industrial stamina and will be a catalyst for the renaissance in nuclear skills in the UK,” EDF says.
“Experience built on the project will create high-value jobs and enable UK businesses to compete around the world to support new nuclear projects already underway or planned for the future.”
