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20 | 3rd - 9Th OcTObEr 2014 | UTILITY WEEK Finance & Investment Market view W ith the cliff-hanging Scottish ref- erendum now resolved, politicos have turned to focus on the party conference season (Utility Week covers this week's Conservative party conference on page 13). With voter concern about this win- ter's energy bills high, energy will no doubt drive a deal of debate across the board, with a ra of differing views being expressed. Labour leader Ed Miliband's well- publicised price freeze pledge has already sparked some heated commentary, as has the prospect of the energy industry's prodi- gious investment requirements for a secure future and the potential role of energy effi- ciency in easing demand. Almost certainly, though, the party con- ference season will pass with a total absence of reasoned analysis about the "big num- bers" that drive UK energy policy. At its heart lies the 2010-20 investment programme, which entails a marked shi to green energy. The Department of Energy and Climate Change (Decc) has concluded that up to £100 billion still needs to be invested by 2020. Since 2010, investment has aver- aged £15 billion a year. While some of the planned expenditure, including the ambitious offshore wind gen- eration programme, has been pared back, the investment requirement remains very challenging. Despite considerable expenditure being projected for enhanced transmission and distribution systems, much of the invest- ment will be generation-related. Worryingly, within the investment projections, a modest amount has been set aside for new baseload plant, which is a vital determinant of plant margin – now below 5 per cent. With two nuclear plants currently una- vailable, there is very little margin le if demand should rise sharply or further unplanned outages occur. Indeed, the only realistic baseload invest- ment for the foreseeable future is the Hin- kley Point C nuclear programme to build two 1,600MW reactors, which will not be com- missioned until the early 2020s, assuming it gets approval from the European Commis- sion for the 35-year £92.50/MWh inflation- linked price guarantee. The £16 billion cost of this plant is unprecedented, even on a first-of-a-kind basis. It is way above the projected cost when nuclear new-build was being debated six years ago. The construction of new gas-fired plant seems literally and metaphorically on the back-burner. Very low spark spreads have slashed returns from Combined Cycle Gas Turbine (CCGT) plants in recent years. Cen- trica's £133 million loss on its CCGT fleet last year underlines the financial struggle faced by such plants. Moreover, it does not send positive signals to potential investors. Despite the seemingly eternal quest to solve the emissions problem of coal-fired plant, nothing is immediately on the horizon because carbon capture and storage research has so far failed to produce scalable and commercially viable technology. Interestingly, although new coal-fired plant has been built in recent years in Ger- many, its financial case has been assisted by low carbon emissions prices (see "Coal Generation Games", Utility Week 19-25 September). Much of the proposed UK investment expenditure until 2020 is related to renew- able generation, despite its general inability to deliver baseload power. To be sure, the combination of the reces- sion, the lack of stable long-term renewable generation policies, political antagonism toward some onshore wind projects and the high costs of offshore wind development have dissuaded many potential private sec- tor investors. Nevertheless, the government has announced some large subsidies, both for offshore wind development, where current costs are around £150 per megawatt-hour, and for its stop-start biomass programme. In the latter case, the UK's largest power plant, the 3,960MW behemoth that is Drax, has been awarded generous price guarantees – of c£105/MWh – to convert one of its units to biomass fuelling. This figure is double the current wholesale electricity price. While generation issues generally secure the headlines, investment in electricity and gas transmission is also formidable. In total, it is expected that around £6 billion a year will be spent during the next decade as energy transmission and distribu- tion networks – many built in the 1950s and 1960s – are modernised. Much of this invest- ment will be undertaken by National Grid, the UK's most valuable utility with a £34 bil- lion market capitalisation. Additional expenditure, of an estimated £11 billion, will be incurred to deliver the much-delayed – and controversial – smart meter programme, now due for completion in 2020. Irrespective of the precise cost of the UK's long-term energy investment programme, it is unquestionably formidable. Hence, it is salutary to consider how it will be financed. The brunt of the cost will be borne by the big six integrated energy companies and National Grid. All seven of these companies, except Centrica, are highly-geared utilities. Their combined net debt currently stands at about £130 billion – no small sum. Remember, too, that all these companies, and especially those based overseas, have serious concerns about the UK's uncertain political environment. Furthermore, Scotland's SSE – having It's the Big Numbers, stupid Industry's investment challenge is being overlooked in the rush to win favour with voters says Nigel Hawkins. National energy security lies in the balance. Forecast electricity new-bUild Source: Carbon Brief. Graph shows how much power Decc expects to come from new power generation built between 2012 and 2030, in a scenario which uses mid-level estimates of economic growth and fossil fuel prices Renewables Nuclear CCGT Coal and oil Cumulative new-build capacity (GW) 2012 2021 2030 45 50 35 30 25 20 15 10 5 0