•  Hann-Ju Ho 

    Utilities sector Insight

    Author Hann-Ju Ho, Senior Economist

    Publication date: 01.08.2010
     


    What next for the UK’s utilities sector?
    Because of obsolescence and for environmental reasons, a significant proportion of the UK’s power-generating capacity will have to be replaced over the next decade. The regulator, Ofgem, estimates that £200bn of investment will be needed to secure sustainable energy supplies, though the Green Investment Bank Commission estimates a much larger figure of £550bn.

     

     
    The deep recession has alleviated some of the near-term capacity pressures in the sector. Moreover, new capacity – under construction or with consent for construction – of about 16.5MW (20% of current capacity) is expected by 2016, more than offsetting an expected capacity loss of 13.5MW over the same period (source: National Grid). Nevertheless, the downward pressure on electricity prices may hinder the ability to meet longer-term investment needs. Environmental targets mean that the energy generation mix will favour gas and renewables at the expense of coal, while the new nuclear power stations, the first of which are expected to come online in 2018, will replace ageing facilities. New coal capacity is likely to require carbon capture and storage (CCS) technology.

     

     ‘Uncertainty’ over the long-term price of imported gas to spur growth of renewables
    By 2016/2017, gas-fired generation capacity is expected to rise by 10MW, which will substantially raise the UK’s dependence on gas. Although this is not expected to be a major concern in the near term (given that world gas prices are anticipated to be weighed by oversupply leading to low prices, resulting from unconventional gas production such as shale gas), it does mean the UK will be subject to the more uncertain evolution of world gas prices in the longer term. This underlines the need for investments in areas such as renewables and ‘smart grids’.

     

    Wind offshore and onshore generating capacity is expected to rise by 4MW to 6.8MWM (8% of total capacity) by 2016, based on current construction and plans with building consent. Longer term, wind is projected from a low base to make up a significantly higher share of energy generation, though cost viability remains uncertain. Energy generation from non-elemental renewables (biomass) is also expected to rise, especially in more densely populated areas, though its share of electricity generation is expected to remain low relative to elemental renewables.

     utlities sector insight graph 

    New pricing regime in the offing
    To encourage innovation and investment by energy network companies, Ofgem proposes to replace the RPI-X regime with a new pricing model (so-called ‘RIIO’) from 2013. The new pricing is expected to raise £32bn of investment in the decade and will apply over an eight-year period, rather than the current five years. Ofgem said that well-performing companies would be able to achieve higher returns, while poorly performing ones would be penalised with more intrusive regulation.

     

     
    The bulk of the investment required for the sector, however, will come from private investors. Measures to encourage investment include a carbon floor price and the establishment of a Green Investment Bank, which should boost investors’ appetite for the sector by reducing investment risks.

     

    Source: This article was first published in Lloyds Banking Group - Perspective Magazine, Edition 2.
     

2/21/2018 1:31:27 AM