Renewable Energy Capital, UK
The Coalition has today published the key elements of its flagship Electricity Market Reform (EMR) Energy Bill. These reforms represent a massive overhaul of the electricity market that will establish a new legislative framework designed to deliver the reported £110bn of investment needed to secure an affordable and low carbon electricity system.
The highlights of the Bill from a renewable energy investor’s perspective include: the introduction of a new low carbon support mechanism in the form of Feed-in Tariffs with Contracts for Difference (CfD FiTs), a significant increase in the Levy Control Framework (LCF) budget to £7.6bn, the establishment of a new company that will act as a single counterparty to the CfDs, and the provision of transitional arrangements that will ensure continued investment in our energy infrastructure while the electricity market reforms are implemented.
The CfD FiT itself is designed to provide investors with greater certainty on the returns they can expect to receive without households and businesses overpaying for the privilege. Their credibility is underpinned by the extent to which the size of the LCF budget can fund the support levels for individual technologies in the years to come and whether the government will ultimately stand behind the CfDs.
To this end the measures proposed by the Government provide investors with much needed clarity on the nature of the proposed support regime, which in our view will help create a robust support framework, reduce uncertainty and put downward pressure on the cost of capital in the renewables space. However, the devil is in the detail and it will be important to understand exactly how the proposed measures will work in practise to ensure they are investment grade.
The withdrawal of a decarbonisation for 2030 is a blow, however, it should be noted this has been delayed not ditched and could even make its way back into the Bill should sufficient support materialise as the Bill makes its way through Parliament. Overall the Department for Energy and Climate Change (DECC) has succeeded in getting the important big ticket items included as part of the package that will in turnl help reinvigorate interest in the low carbon sector.
From our own recent activity in the marketplace we have found there is significant investor appetite for renewables projects in the UK that are due to become operational prior to the next RO banding review in April 2014 and even up to the close of the RO in 2017. In contrast development portfolios with longer lead times and more uncertain grid connection dates receive less interest and often command higher risk premiums. We expect this outlook to hold sway until the finer points of the EMR are settled including further details on the strike prices that will ultimately define the value of the CfDs.
The publication of the Energy Bill is proof the government is committed at the highest levels to deliver on its energy policy goals. The Bill will play a big role in attracting new capital into the UK renewables sector and we envisage many of Jones Lang LaSalle’s traditional property investors will start to take a closer look at potential opportunities in this field given we are already seeing certain family offices and institutional investors actively considering making the their first investments in the sector. We expect this trend to grow in the years to come and will continue to refine our services to cater to our clients’ needs. Electricity Market Reform is a contentious subject and has taken many twists and turns in getting to where we are but the government is on the right track and the outlook is positive.