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UTILITY WEEK | 4Th - 10Th JULY 2014 | 21 Finance & Investment Since such plants were fairly straightfor- ward to build, they began to dominate new renewable energy output. However, onshore wind is now increasingly constrained by political and environmental concerns, as wit- nessed by the many projects recently turned down by the Department for Environment, Food and Rural Affairs. Nowadays, climate reduction targets – for better or for worse – are crucial. Under the Energy Act 2013, a new subsidy regime has been put in place, which aims to equate the payment of subsidies with the projected out- put necessary to meet the UK's environmen- tal obligations. What is undeniable today is that much of the renewable generation sector is subsidy- driven. When the electricity supply indus- try was broken up in the late 1980s, it was argued that electricity generation should become a genuinely competitive industry. Such aspirations, especially with regard to renewable generation, have long since been jettisoned. Nigel Hawkins (nigelhawkins1010@ aol.com) is a director of Nigel Hawkins Associates which undertakes investment and policy research Drax unit three biomass conversion Tilbury biomass conversion Eggborough biomass conversion Walney extension Beatrice offshore windfarm T he UK regulatory authorities are among the global leaders in introducing market-based fundamentals to utility markets. In the 1980s we saw the liber- alisation of the UK energy market, and recently we have seen the introduction of competition between water company retail suppliers. However, this stance appears to be changing. Fixed tariffs have been introduced to incentivise renewable energy generation projects. Subsequently wholesale market power prices have fallen and further new-build generation projects were deemed uneconomic without govern- ment assistance. With the reserve margin in the UK forecasted by National Grid to reduce from c.30 per cent in 2013 to 5-10 per cent in the next couple of years, we observe that Decc has been forced to provide incentives for new-build generation. In order to stimulate this development, contracts for difference have been awarded for nuclear power, and long-term capacity payments for new combined cycle gas turbine plants are quickly following. This leaves the generators with existing capacity with challenging economics. One potential solution that has been proposed is for capacity payments to be available for existing flexible generation. If this occurs, then all the main forms of generation will be remunerated by government-set tariffs and not solely based on the energy market. But why stop there? With so much political focus on the cost of living, policy- makers may even consider introducing fixed billing rates for suppliers. The UK utility industry would then have gone full circle and be back to where things were before liberalisation. Everything the regulators and government agencies have done may make sense in isolation, but there seems to be a lack of thought about the long-term repercus- sions of any of the changes made, showing the risk of intervening in market-based sectors. A hybrid approach to the market and tariffs is difficult to achieve when looking for significant capital investment. The next ques- tion will likely be, how long before the authorities start to move back to a more market-based energy sector? Daniel Wong, head of Macquarie Capital, Europe "A hybrid approach to the market and tariffs is difficult to achieve when you are looking for significant capital investment" Investor view Daniel Wong "The reserve margin is forecast to fall to 5-10%"