Doubts raised over lofty energy investment goal

By David Blair in Kessingland

Giraffe stands in front of the newly constructed Wind Turbine at the Africa Alive wildlife park in Kessingland

The giraffes of the wildlife park in Kessingland, long accustomed to towering over all comers, have been dwarfed by the latest additions to their home. Two wind turbines measuring 410ft – the height of more than 20 giraffes – now dominate the landscape.

This new wind farm in Suffolk, owned and operated by Triodos Renewables, a green energy company, is exactly the kind of project the government wants to encourage. Wind power accounts for about half of the £200bn the government believes Britain must spend on energy infrastructure by 2020.

But analysts are pondering a critical question: is this level of investment achievable, particularly given the financial condition of the big six utilities which would have primary responsibility to deliver? And will higher energy bills – the inevitable result of expenditure on this scale – prove politically tolerable?

James Vaccaro, managing director of Triodos Renewables, said a “compelling business case” lay behind Kessingland wind farm, which, weather-permitting, generates 4MW of electricity.

The government has imposed a “renewables obligation” on electricity suppliers, forcing them to buy a proportion of their power from renewable sources. The Kessingland turbines, which cost £6m to build, benefit from a power purchase contract that should allow an annual return of 10 per cent for their 20-year lifespan.

The lesson, according to Mr Vaccaro, is that government incentives are delivering investment, making the £200bn target achievable. “I’m fairly confident that we will get there. The challenge is the timescale because we have to get there pretty quickly,” he said.

Even if the timetable were extended, however, some analysts believe the goal is unattainable. Of the UK’s big six utilities, four are European-owned. Two, RWEand Eon, have been damaged by Germany’s decision to phase out nuclear power by 2022.

Last month, Eon announced its first quarterly loss and pledged to cut costs by €1.5bn every year until 2015. RWE, burdened by net debt of €27.5bn, has promised €11bn of asset sales by 2013.

Peter Atherton, head of utilities at Citi Investment Research, questioned whether their UK subsidiaries were in any condition to invest large sums. “You can’t separate what is happening corporately to Eon and RWE from what they might be able to do here in the UK,” he said.

“Given the current market conditions, it has become difficult for the boards of many utilities to do anything other than cut their capital expenditure – and that’s what we’ve been seeing.”

The government plans to unlock the £200bn by reforming the electricity market, principally by giving nuclear power and renewable technologies a fixed price for their electricity.

However, Mr Atherton stressed that household bills would inevitably rise. “It is unrealistic to believe that industry can put £200bn of new assets in the ground without consumer bills rising,” he said.

Energy bills place a disproportionate burden on the old, the poor, and on manufacturing industry. As the £200bn cost of the government’s ambitions pushes future bills upwards, ministers may come under pressure to reverse their reforms. The utilities will have to weigh this risk, recalling Germany’s U-turn over nuclear power and Spain’s decision to cut renewable energy subsidies this year.

If they continue investing, they would have to believe that “ministers of the day” will “stand up and say ‘not only is it a good thing that bills and profits are both rising, but we planned for it and it’s going to carry on’”, said Mr Atherton.

“With other governments in Europe backtracking when facing the very same question, the logic is that the British government of the day will do the same.”

The performance of Chris Huhne, energy secretary, at the Liberal Democrat party conference this week – when he blamed the utilities for higher bills – may reinforce this scepticism.

However, Scottish and Southern Energy, the UK’s second-biggest generator, plans to spend £8bn by 2015, largely on renewable energy and transmission upgrades. It said it had “already drawn upon a diverse range of financing options”.

Simon Wilde, senior managing director at Macquarie Capital, believes the government will stick to its reforms and that the £200bn target is achievable.

Offshore wind farms, costing some £55bn, will be the single most expensive item. Mr Wilde believes about £30bn could be raised from banks, with another £15bn from external equity financing, particularly given the interest of Asian investors.

That would leave £10bn from the six utilities – “a very manageable number”, said Mr Wilde, especially as it would be spread over 10 years. “By having this plurality of investors, you’ll find the money,” he added. “The market will provide a solution to this, provided the regulators don’t get unduly in the way.”

Whether Mr Wilde or Mr Atherton proves correct will show the path of future British energy policy.

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