by Peter Dickson. As published by The Times on June 19 2013.
We can’t say we haven’t been warned. In a speech delivered earlier this year, Alistair Buchanan, the outgoing chief executive of Ofgem, reminded us that the lights will go out in Britain unless we act now to replace our ageing power infrastructure. In three years time, the reserve margin — or the headroom in our power capacity at peak times — will fall from 14 per cent to 5 per cent, a level he describes as “uncomfortably tight.”
What this means practically is that, for the first time in four decades, we will no longer be able to rely on the power supply required to keep the wheels turning in British businesses.
The 1970s was the last time this country suffered rolling blackouts and introduced the “three day week”. More than 40 years later, we face the same fate. Generating capacity is being decommissioned at an alarming pace with the entirety of Britain’s nuclear fleet, as well as 60 coal fired power stations, due to close in the next decade. And renewing our capacity at a time of economic depression isn’t an easy task, particularly in light of the financial costs, estimated by the Department of Energy and Climate Change to be £110 billion. Timing is an issue, too, as investment in new nuclear facilities won’t yield results until 2020 at the earliest. The UK has little option but to seek ever more quantities of gas to meet the energy shortfall. But at what cost?
The prices of the fuels we use to generate power are driven by global forces. The International Energy Agency forecasts that demand for gas worldwide will rise by 50 per cent by 2035 which means the long term price trend is against us. And the nature of the world’s largest suppliers of gas, the US, Russia, Iran and China, raises questions over not only price but the guarantee of the security of supply. This means that without domestic reserves of our own, we are placing our energy security in the hands of other nations. I believe the best way to change this and rise to the challenge is through major private investment in clean energy infrastructure.
Clean energy infrastructure assets such as wind farms, solar parks and biomass plants can provide a security of supply that no fossil fuel equivalent can offer. This makes them attractive not only to governments but to institutional investors seeking visible and consistent returns over a long period of time.
By their nature, clean energy infrastructure assets are environmentally superior to other available options. They will also help the UK meet its obligations under the Climate Change Act, a law passed with almost unanimous support in Parliament. Crucially, clean energy power assets can be built and commissioned quickly unlike their hydrocarbon and nuclear counterparts.
So which technology will solve the problem and offer the best returns for investors? In reality, our problems will not be solved with any one technology or fuel because our country requires a balanced portfolio to de-risk its energy infrastructure. Nuclear has a major role to play, but plants will take many years to build. Gas, meanwhile, is inherently risky, given the lack of security of our supply. Speculators may be wooed by the fashionable opportunities in shale, although it is far too early to say what contribution it will make. Only clean energy infrastructure assets give investors true, long term visibility over their input costs — virtually nil — and therefore provide both wealth protection and predictable rates of return.
Tackling the challenge of powering both Britain and Europe as a whole presents a considerable opportunity for investors. The decisions being taken today are providing investors with a once in a generation opportunity to buy exposure to a diversified basket of assets by funding the construction of a modern, sustainable energy infrastructure. As a consequence, for both Government and investors the time to act is now. Or we’ll soon be in the dark.