Pace of UK energy sector investment too slow – Ernst & Young
The pace of investment in the UK power sector is falling behind what the country needs to meet its 2020 emissions reduction target, according to an Ernst & Young report released on Monday.
Investment in upstream energy assets is expected to be higher in 2012 than the average spend for the five preceding years. However, decisions to go ahead with current projects were made between 2005-2009 in an environment of greater optimism, the report stated.
Energy sector investment has averaged £8bn (€10bn) a year for the past five years, and is expected to jump to £11bn by the end of 2012. However, the increased rate is still too slow to build enough low-carbon generation to meet the UK's 2020 emissions reduction target.
Previous Ernst & Young research from 2009 found that the UK would need to invest around £16bn/year, based on a £200bn aggregate amount set out in regulator Ofgem's Project Discovery.
Regulatory uncertainty, an era of rising energy prices and increasing environmental legislation costs are expected to put the brakes on new investment in coming years.
"The attractiveness of the UK investment framework has worsened notably compared to 2010. This is resulting in many potential commitments being deferred, or being declined altogether. The investment momentum built up to 2012 is highly likely to diminish," the report stated.
The power sector is particularly at risk of a slowdown in investment, according to the report. "Since 2010, there has been a declining trend in applications for new investments and... more projects are being terminated before completion. This is potentially due to a lack of availability of long-term funding or economically attractive commercial contracts (for example, gas supply and power offtake for a new combined cycle gas turbine)."
One such example is UK utility Centrica's decision to shut down its 230MW Roosecote open-cycle gas turbine plant because it was unable to secure a deal in the contract power market (see EDEM 25 October 2012).
The Ernst & Young research also found that investors were less willing to commit to projects that do not offer regulated returns, including coal and gas-fired generation. A series of interviews with senior industry executives found that investors preferred projects with regulated returns, including electricity and gas transmission and renewable generation.
Despite the negative investment outlook, the research found that the UK energy market remained one of the most competitively priced in Europe.
Separately, an EC Harris report into offshore wind costs found that greater competition among turbine manufacturers and operations and maintenance providers could ease supply chain bottlenecks and reduce costs. Greater collaboration between different firms along the supply chain and embedding contracts with performance incentives and penalties for delays would also contribute to cost reduction. KB
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