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UTILITY WEEK | 12TH - 18TH JUNE 2015 | 21 Finance & Investment I t looks increasingly as if onshore wind has become too cheap to be awarded a renewables contract, but too much of a misfit to live in the fossil generation market. It is oen said that investors are good at living with risk, where market prices can go up or down, but bad at coping with uncertainty, where the rules of the game can themselves be changed. This adage has seemed particularly apt in recent weeks for wind investors. Some investors may feel that the news of a Tory sub- sidy change for onshore wind has highlighted the worst aspects of UK energy policy: the UK wants to use "market mechanisms" as an investment driver, but its artificial markets are oen worse than having no market at all. Renewables policy has come a long way from the simple Renewables Obligation Certificates (Rocs), where all renewables received the same premium to market prices. Aer banding came different technology buckets for contract allocation and then auctions. The revealed prices tell us little about the value of the generation. While offshore wind and nuclear still appear expen- sive enough to secure government contracts, new wind projects are appar- ently expected to compete with fossil generation. The problem with this is that the traded European carbon price is pitifully low and UK carbon price support is uncertain and well below the implied carbon prices from other forms of policy support. In addition, cash out and spot pricing for wind have considerable risks. Existing and new fossil stations are awarded capacity contracts while onshore wind may have to rely on spot market revenues alone. To its credit, the UK has a track record of standing behind remuneration frameworks for existing capacity, but how do investors put a value on developing and deploying new technologies when their success may have more to do with fashion than economics? In the end, onshore wind developers wanting to survive in the market in the long term may just seek to cut out the middle man and go direct to end users. As onshore wind becomes cheaper, corporate and even some household customers may be willing to pay the full costs of the renewable generation in order to have a genuinely green supply with no subsidies. Until then, developers may feel unloved and homeless. Martin Brough, utilities equity analyst, Deutsche Bank "How do investors put a value on developing and deploying new onshore wind when their success may have more to do with fashion than economics?" Analyst view Martin Brough "Onshore wind developers may just seek to go direct to end users" More generally, Bristol remains concerned about its ability to finance its future capital expenditure if it had accepted the final deter- mination figures. Ofwat has countered this concern by stat- ing unequivocally that "Bristol is financeable at final determination". The CMA is likely to endorse this stance. For all Bristol's carefully constructed arguments on various financial issues, Ofwat's case remains a powerful one. Aer all, the other 17 water companies have all accepted their final determination figures, which were based on the lowest ever Wacc for the water sector. As the CMA deliberates, Ofwat will sense that this fact provides a shield which strengthens the argument that Bristol is seeking to be a sector outlier. Aer all, there is little inherent difference between Bristol and the other water-only companies, although long-term water supply may be less resilient there, partly because of the expanding population. In fact, the most obvious outlier of the whole sector is Thames because of its contro- versial £4.2 billion Tideway Tunnel project, the financing of which cannot be suitably accommodated within Ofwat's regulated asset value (Rav) regulatory model. Fol- lowing the election of a majority Conserva- tive government, this project is now set to proceed. That said, it seems unlikely that Bristol will leave the CMA empty-handed, although any financial award will probably be fairly minor; the latter will also be mindful that any major change could stir up a hornets' nest. Eventually, peace will have to prevail between the two protagonists. Interest- ingly, the Battle of Transco in the 1990s pro- vides some precedent for how this might be achieved. It's terms of peace were drawn up following the change of key personnel. This suggests that one feasible scenario is a sale – in whole or in part – of Bristol. Pen- non's recent deal to acquire Bournemouth shows that bidders are still out there and ready to invest in solid long-term infrastruc- ture assets. With the recent general election result indicating a presumed five years of major- ity government rule, long-term bidders are bound to be scrutinising the water sector's long-term cash flow. The eventual fate of Bristol – a privately owned company for almost 170 years – and its Cheddar Reservoir 2 project is far from clear. Its next few months will certainly be interesting. Nigel Hawkins, director, Nigel Hawkins Associates Ofwat has told Bristol Water that it must cut average household builds from £197 to £152 by 2019/20. The two are at log- gerheads about Bristol's ability to do this because of some very different basic assumptions. £288m Ofwat's assumed five-year cost base £359m Bristol's assumed five-year cost base 5.65% Ofwat Wacc assumption 6.4% Bristol Wacc assumption 2.59% Ofwat cost of debt assumption 3.15% Bristol cost of debt assumption THE BIG NUMBERS