ECEM: Brexit vote sparks jitters but sentiment positive

The UK’s green energy sector sees some reasons for optimism following the country’s EU referendum, despite political turmoil, concerns over rising project costs and uncertainty that may hamper investment.

Last week the Department of Energy and Climate Change (DECC) was abolished as part of a shake-up of government departments by new Prime Minister Theresa May, with its functions transferred to other government departments, notably the new Department of Business, Energy and Industrial Strategy. At the same time, May appointed Greg Clark to take over this newly-created portfolio.

The Brexit vote paved the way for havoc in commodity markets after the pound dropped to the lowest level in over 30 years. As the political stage settled down, clouds lingering over the renewable energy sector were not so quick to disappear. There has been some recovery in the strength of the pound, but for the green sector, the effect on investment may take longer to play out.

The negative

The spokesperson for the European Wind Energy Association, Oliver Joy, said that the vote for Brexit did “cast a shadow over investment”, but noted that this stemmed mainly from the uncertainty of the situation in the upcoming years rather than the prospect of Brexit itself. “The industry hates uncertainty,” he said.

Energy lawyer, Neil Budd from Shakespeare Martineu called the current situation “a mixed bag”.

“Project costs are obviously going to be higher because imported equipment is now more expensive. On the other hand, power prices have risen,” he said.

Experts said last week that both new renewable and thermal projects are set to face higher costs of capital and debt financing, pushing up the underlying cost of projects in the immediate aftermath of the EU referendum result.

Short-term uncertainty derived from the costs of imported capital equipment and wholesale electricity prices could add to the cost of financing projects, according to Frontier Economics’ energy team.

The positive

Joy said that despite the turmoil, “there are a few things that show a commitment to wind energy”. He praised the clear strategy from the government to continue with the Contracts for Difference auctions – a support system for green power producers introduced last year as a replacement for the recently concluded renewable obligation (RO) mechanism – over the coming years. This concerns mainly offshore wind.

“There is a clear path way towards 202 for offshore wind and the UK has said they will install 1GW per year until 2030 so that gives us a good image until then,” Joy added. Further details are needed though, on the volumes and auctions sized for the period after 2020, he explained.

Meanwhile Budd agreed that there was a positive sentiment. “The general feeling is positive because Greg Clark, the new secretary of state is regarded as pro-renewables,” he explained.

Clark will be in charge of continuing the government’s electricity market reform programme, which was implemented in late 2012. His duties will include administering the current subsidy mechanisms promoting investment in new renewable and thermal capacity, principally the contracts for difference (CfD) scheme and capacity market. sophie.udubasceanu@icis.com

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