UK renewable energy leadership ‘under threat’

Buried deep within the UK’s political tumult of the past six months has been a disturbing trend: the slow, but consistent, weakening of the environment for renewable energy investment. Through a series of policy changes and a decisive shift in tone on critical sustainability issues, the UK risks moving backwards on long-term energy strategy.

A recently mooted windfall tax on renewable energy generators is one example of this. If the UK is to maintain its status as an international leader in clean energy, there are specific areas of concern that require a swift resolution.

The UK will require substantial external funding to reach net zero by 2050, with academics estimating that it could take £6trn of capital investment. In addition, renewable infrastructure projects require investors to commit capital for decades to achieve their targeted returns. Consequently, the consistency of the regulatory regime and government policy is of paramount importance if we are to convince investors of the relative attractiveness of UK renewables.

Indeed, one of the reasons that the UK has been so successful in its deployment of offshore wind is the long-term contractual commitments and thoughtful design of its subsidy regimes.

Inconsistent regulation

However, recent administrations have often appeared to make policy without full consideration of the complexities and limited engagement with the industry. The current debate around windfall taxes is a prime example. After weeks stating opposition to a windfall tax, the UK government (under then prime minister Liz Truss) announced that it would implement one. 

Moreover, rather than reinforcing existing measures on fossil fuel producers, it targeted renewable energy generators – the same generators with which it had been negotiating a modified version of the subsidy regime the previous week.

The technical detail of the proposals is sparse. Not only does the level of the revenue cap remain a mystery (this is the single most important aspect of the entire policy), but there appears to be little recognition that most producers have already secured fixed pricing for their electricity output in the near term.

So, the bumper profits that ministers planned to raid may not be quite as bumper as expected. Furthermore, the scheme might be restructured altogether by the new regime under prime minister Rishi Sunak. Such decisions are not conducive to creating a positive environment to encourage decades-long commitments from investors.

Questionable incentives

A closer look at the UK’s long-term energy strategy raises some questions about whether short-term political gains are guiding decisions more than the long-term benefits to energy resilience.

The most obvious example is efforts to stymie development of onshore wind and solar projects, jointly the cheapest forms of electricity. Rather than a permitting process that accelerates responsible development of such technologies, the government is actively attempting to block them. Former prime minister Truss campaigned to ban solar “paraphernalia” on low-productivity agricultural land for “food security” reasons.

However, it makes no economic or scientific sense, as selective usage of such land for clean energy generation would be much more productive. The scale of current land usage is greatly exaggerated when you consider the fact that less than 0.1% of land in the UK is used for solar farms, versus 56% for agricultural and 0.5% for golf courses.

As well as blocking cheap and efficient sources of energy, the UK is also attempting to encourage unsustainable and uneconomic alternatives. The most obvious is the recent flirtation with a relaxation of fracking restrictions, a policy that no one, not even the fracking industry, thought was a good idea.

The policy was in direct contravention to the Paris Climate Accord and the capital costs would offset any investment case. Moreover, while selective use of nuclear power and funding of carbon capture projects makes sense as part of a broader energy strategy, they are overemphasised in current plans relative to currently available technologies which are cost-effective and quick to deploy.

Renewable energy powerhouse

Over the past decade, the UK has established itself as a renewable energy powerhouse, consistently generating almost 40% of its electricity from renewable sources. However, recent policymaker attitudes towards renewable energy are troubling and, should they continue, risk making the UK a less attractive destination for international infrastructure investment.

Building an affordable and independent energy system requires huge and sustained investment over multiple decades. This investment will be predominantly funded by the private sector and large institutions. The only way such investment can be underwritten is against a stable regulatory and policy backdrop.

Over the next 30 years we are likely to see a huge proliferation of potential infrastructure investment projects in need of funding relative to the pool of available capital. By making the UK a less attractive destination to invest under the premise of disinflation, we risk higher cost infrastructure, greater long-term energy dependency and higher power prices, all of which are, ironically, inflationary.

While there is still time to correct the course, significant changes in both policy and tone are required if we are to build an energy system that is affordable, green and secure in the long term.

Ryan Boothroyd is portfolio manager at the Border to Coast Pensions Partnership.