The main points to draw out from this submission are outlined below:

• The recent investment decisions on nuclear present an opportunity for renewables and flexibility to ‘fill the gap’ in capacity forecasts; however, revenue stabilisation support is required from Government. Nuclear generation is not complementary to deploying sufficient renewable capacity to meet decarbonisation goals and develop sustainably.
• Despite having excellent renewable resource potential, the UK is less attractive for investment than it used to be compared to other countries. This is due to the removal or scaling back of support mechanisms and the increased amount of regulatory uncertainty present in the market. There is an opportunity to re-stimulate the low carbon economy and grow the export capability of UK industry.
• There have been very limited improvements to the UK energy investment environment over the last three years and regulatory uncertainty is now a significant factor in investor decision making. Some successes have been recognised in the offshore wind sector with the CfD and more recently the offshore wind sector deal. This model should be replicated for other sub-sectors of the low carbon economy.
• Long term Investors with a lower cost of capital will be drawn to the UK if there are well designed, stable revenue support mechanisms available to renewable energy. There is a significant economic opportunity to the UK in fostering renewable energy infrastructure supply chains with a high degree of local content and associated work force skills.
• Due to the fall in investment in UK renewables, there is a requirement for increased revenue stabilisation support mechanisms. Development and improvements to the CfD would be a sensible method of redressing the balance between public sector cost and de-risking of private sector investment. Whether a Regulated Asset Base would deliver new nuclear is secondary to the question of whether new nuclear generation is required.
• There are a number of steps that the Government could take to improve investment in the UK low carbon economy. Crucially, what is needed is; a review and expansion of the CfD mechanism, clarity and commitment on the desire to meet and surpass decarbonisation targets, and support for new and developing UK supply chains. These and other steps are discussed further in the final section.

About JLL Energy & Infrastructure Advisory

The Energy & Infrastructure Advisory team, within the Capital Markets division of JLL, provides a range of corporate finance expertise covering fund raising, deal structuring, due diligence and valuations to developers, investors, property estates or corporate entities active in the energy infrastructure market.

We are submitting evidence to this inquiry because we have relevant experience and expertise to draw upon in this sector. We are a leading financial advisor in the UK renewables sector and believe that there is urgent action required to stimulate investment in renewable energy in pursuit of sustainable development. Our  team website can be viewed here: http://www.jll.eu/emea/en-gb/services/property-types/renewable-energy

1. How do recent investment decisions on nuclear and trends in low carbon investment affect the UK investment outlook for energy infrastructure?  Is there a case for changing the Government’s current approach to delivering a low cost, low carbon energy system? How could the ‘nuclear gap’ be filled?

1.1. The outlook for investment in UK energy infrastructure has become extremely unclear in light of recent investment decisions on nuclear and trends in low carbon investment. As a result, there are two related consequences of these developments:

i)        investment withdrawal decisions in the nuclear industry present an opportunity for renewables to fill the capacity gap left in forecasts as a result of new nuclear not being built; and

ii)      this opportunity is at high risk of being wasted due to regulatory uncertainty, the withdrawal or reduction of support mechanisms and changes to planning law which have all significantly negatively impacted trends in renewable investment.

1.2. To set context, the investment landscape for low carbon energy generation has become highly polarised as a result of recent changes in the UK energy economy. At one extreme, some investors have withdrawn from, paused or reduced their activity in the energy sector, whereas other investors have concentrated activity to the subsectors of the energy economy where there is still some degree of certainty. This has resulted in areas such as offshore wind continuing to make cost reductions and increasing deployment. Other sectors, such as onshore wind and solar, have seen sharp and significant falls in investment over the last two years, despite being the cheapest form of energy on a levelised cost of electricity basis.

1.3. The recent decisions on nuclear present the UK with a second chance to regain lost ground towards carbon budgets and deploy generation which is more sustainable in the long-term. Nuclear generation may not prove to be a cost-effective long-term energy infrastructure asset due to the lack of coherent long-term waste management strategies, security and safety risks, and high cost public subsidy and warranties. Furthermore, it should not be seen as compatible with a required national generation mix characterised by a high penetration of intermittent renewables. Intermittent renewables need to be supplemented by flexible generation, demand side response and a smart grid - not highly inflexible, ‘must-run’, centralised, baseload generation. Nuclear generation would be competing at the bottom of the merit order with renewables for grid dispatch which worsens the cost-effectiveness (in terms of carbon and tax payer money) of both forms of subsidised generation, for example, in the event that constraint payments are made. For these reasons, in addition to the extremely high Hinkley Point C CfD strike price, the Government’s approach to delivering an energy system so far may not be viewed as low cost as it could have been. Flexible generation, such as batteries, CHP and demand-side response amongst others should be fostered in order to create an energy sector which is low carbon, low risk and low cost.

1.4. The nuclear gap can ideally be filled quickly by renewables, all types of flexible generation and demand side response. The government should act efficiently to ensure that the regulatory and subsidy environment is consistent across intermittent and flexible generation to allow investors to gain confidence and make investments which ensure they have a balanced portfolio of both types of assets.

2. How attractive is the UK energy sector for investment compared to other countries?   Are there particular technologies which are more – or less – attractive to investors under current arrangements?

2.1. The UK energy sector is significantly less attractive for investment than it used to be compared to other countries. Investors have been deterred by increased risks presented to them in the form of the withdrawal and reduction of support mechanisms, regulatory uncertainty around network charging and changes to planning law.

2.2. This fall in global investment attractiveness is set against a backdrop of extremely high renewable resource in the UK, such as wind and marine energy, and has also been at the expense of future growth opportunities in the UK economy, instead of capitalising on building a skilled workforce and supply chains which would be in high global demand over the coming years. Failure to fully exploit the UK’s renewable resource potential and opportunity for sustainable, economic growth is not cost-effective for the consumer, reduces the rate of decarbonisation and risks security of supply, and therefore falls short of each of the three pillars of the energy trilemma.

2.3. Regarding particular technologies, onshore wind and solar are very unattractive due to the lack of revenue stabilisation under current regulatory arrangements – this is despite being the cheapest form of generation and therefore the most cost-effective technology to support. Other forms of technology, such as batteries and peaking plant, are not viewed favourably by investors because of reforms to network charging and uncertainty around grid services contracts or reduced revenue streams from such services that are required to supplement high national intermittent capacity. Although there are reforms to grid service revenue streams on the horizon, which could be a positive development if implemented well, there is much more detail and regulatory commitment needed to give confidence to investors in revenue streams for flexible generators – the reward would be lower cost of capital and therefore a lower cost energy system which supports a high degree of intermittent output.

3. How has Government policy improved the UK energy investment environment over the last three years?

3.1. Most changes in government policy over the last three years would appear to have adversely impacted the UK energy investment environment. The closure of the Renewables Obligation and the Feed-in Tariff, reductions in RHI tariffs and significant changes or proposed changes to network charging arrangements all appear to have negatively impacted investor confidence. This is in addition to the significant uncertainty and risk caused by the suspension of the Capacity Market.

3.2. The developments in energy policy over the last three years which can be viewed as positive have been the following:

1. The rapid deployment of offshore wind as a result of a clear strategy whereby government committed to CfD capacity provided the industry met cost reduction targets;
2. The Renewable Heat Incentive has improved the economics of technologies to help with decarbonising heat, although its success has been limited by recent tariff degressions;
3. The commitment and clear vision made by the Offshore Wind Sector Deal announced in March this year; and
4. Proposals to revise the planning regulations to make it less costly for larger co-located battery storage to gain planning permission.

3.3. These positive developments have been welcomed and learnings from their implementation should be replicated for other sectors. However, three years ago, regulatory uncertainty and risk was not considered nearly as high by investors as it is now, who are forced take this into account in their decision making and cost of capital. Onshore wind and solar have of course been significantly impeded by the removal of support mechanisms and changes to the planning system, but with the capacity gap left by undeveloped nuclear projects and the urgent requirement to decarbonise heat and transport, the government now has an opportunity to provide renewed confidence to investors through revenue stabilisation mechanisms.

4. What types of investor can we expect to finance future UK energy infrastructure? What are their criteria for investment, including on risks and returns?  Does it matter if investors for specific technologies are largely from overseas?

4.1. The answer to the first part of this question largely depends on the design of the regulatory environment. If subsidy or revenue stabilisation mechanisms are well designed, then finance from investors with a long-term appetite and lower cost of capital will be attracted. To re-attract these investors back into the UK energy economy would be in the interest of the consumer and help to get the country back on course for meeting the fourth and fifth carbon budgets. Currently, many investors are not able to significantly contribute to energy growth in the UK aside from offshore wind.

4.2. There will always be an element of uncertainty in financing widescale energy infrastructure reform, but the cheapest cost of capital is attracted when investors have long term visibility and confidence over revenue streams – this should be the priority of UK energy policy design. Investors have become broadly comfortable with construction risk. Development risk is broadly acceptable to some investors although the regulatory environment can assist here too, for example with easing planning requirements and risk. The most important contribution that energy policy can make is to give investors’ confidence around the stability of operational revenue – once merchant risk is reduced as much possible the cost of financing will become more cost-efficient.

4.3. It is important to note that there will be a requirement for investors with a range of risk appetites and investment criteria from long term, low cost institutional investors to high risk, high return equity investors. However, under the current regime, the balance between the two in UK energy financing needs redressing.

4.4. Regarding the role of overseas capital, the presence of overseas investors should be welcomed to increase competition and innovation in financing arrangements. It should be considered that a high degree of merchant risk in revenue streams will necessitate a higher degree of influence over the market and control of the asset(s) from an investor. Some examples of this may be regulatory or political lobbying. A lower cost, more stable revenue stream may require less regulatory or market intervention from investors. 

4.5. The most important issue in considering the role of overseas capital is the economic opportunity to the UK from a high proportion of local content in supply chains for infrastructure which is high in global demand. The direct benefit and growth potential to the UK economy through the exporting of skills and technology could be highly valuable. Through the reform of our energy policy environment, the UK has an opportunity to ensure this is realised.

5. What role should the Government play in providing financial support and sharing risks for new energy infrastructure?  Are existing financing mechanisms, notably the Contracts for Difference, fit for purpose? Are there any practical issues, or potential unintended consequences, that could affect the feasibility of implementing alternative support models (such as a Regulated Asset Base)?

5.1. The role of Government should be to design and maintain energy policy which fairly bridges the gap between de-risking private sector investment and doing so at a reasonable public sector cost. As there has been a significant reduction in new energy infrastructure being built, it is reasonable to conclude that this balance is not being struck by current support mechanisms. There is a requirement for government to reconsider support mechanisms because investor requirements around return on debt and equity (in terms of both profit and pay-back duration) are not being sufficiently met – the consequence of this is that long term emissions targets are being jeopardised and the opportunity to re-stimulate and grow the low carbon economy will pass by. To recover this opportunity the Government will need to deploy revenue stabilisation mechanisms which give certainty and confidence to investors over the long term. The recent removal or upheaval of support mechanisms that have been seen over the last three years have undermined investor confidence.

5.2. The Contract for Difference is a suitable mechanism to provide revenue stabilisation to investors, however it is important that the strike price is not at an unreasonable cost to the public sector, nor too low to be of interest to investors. The CfD allocation rounds achieve an acceptable level of competitive behaviour to be able to meet this important balance. The success of the CfD has been largely limited to the offshore wind sector – not only is there more potential in this sector but also in other renewable technology types, such biomass, energy from waste, geothermal and marine. The benefit of this proposal is to build upon success with a familiar mechanism.

5.3. The practicality of implementing a Regulated Asset Base support mechanism to enable the financing of new nuclear assets has both advantages and disadvantages to consumers. It may be that the RAB model is a suitable way to build new nuclear capacity, but the more important question is whether new capacity in the form of nuclear is required. There is a strong argument not to build new nuclear capacity because its generation profile is incompatible with and not complementary to intermittent renewable generation – deployment of such generating capacity being the most cost-effective and sustainable way to decarbonise. Therefore, the unintended consequence of implementing a RAB model to build out new nuclear would be creating national generation which is inflexible and does not support growth in renewables. Furthermore, it would significantly stifle the ability of innovative, new low carbon technologies (including those not yet developed) being able to compete because nuclear is a ‘must-run’ baseload generator. The issue of safety, security and long-term waste management would still be an issue for nuclear should a RAB model be used to bring new capacity to market.

6. What further steps should the Government take to increase investor confidence in the UK energy sector?

6.1. There are many steps available to the Government in order to increase investor confidence in the UK energy sector which will help to ensure the UK meets decarbonisation targets and realises the economic opportunity that it could deliver. The table below provides some high-level policy ideas which may assist in pursuit of these aims.

April 2019