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UTILITY Week 19th February 2016

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Finance & Investment utILIty WeeK | 19th - 25th February 2016 | 15 Analysis I n recent months, prominent investors have been telling MPs on the Energy and Climate Change Committee what could be done to make them feel more comfortable about ploughing money into the UK energy sector. Utility Week has put together a list of the top five things policymakers should do to win the confidence of investors, based on what they said. 1. No more surprises The government's last-minute decision in November to cancel the £1 billion competi- tion to develop a carbon capture and storage (CCS) facility provides the perfect example of what not to do. E3G programme leader Chris Littlecott described what happened as "shabby", telling the committee: "It reflects very badly on the UK government's relation- ship with business and their ability to drive long-term investment." Director of business and investment at Tees Valley Unlimited Neil Kenly only found out about the decision on the day of the public announcement. "Within hours the phone started ringing from the private sec- tor companies that we have on board, trying to understand what the implications were, going forward," he said. The only hint of what was about to hap- pen came in a newspaper article the day before, said Capture Power financing direc- tor Richard Simon-Lewis: "That is the first time that we got a sense that something was coming down the track… It is fair to say it was very unexpected from our standpoint." Chief executive of the Carbon Capture and Storage Association (CCSA) Luke Warren said things haven't improved since: "There has pretty much been radio silence from Decc [the Department of Energy and Climate Change] and from the government in general about the next steps." 2. Make fewer policy changes, none of them retroactive Investors told the committee the sheer vol- ume of policy changes was making projects more risky. Octopus Investments' chief finan- cial officer and co-founder Chris Hulatt said changes could undermine confidence "even if relatively minor". Chief executive and managing director of Velocita Energy Developments Andree Lee said investors were already pricing the risk into their decisions: "When you look at an investment situation for the UK, you will only do it at a much higher cost than in, say, France or Germany, because the energy mar- kets and tariff structures are so much simpler with much less opportunity for chopping bits off or loading in extra costs." Policy changes that were seen as being retroactive were particularly damaging to confidence, investors explained to MPs. Chief executive of the Solar Trade Associa- tion Paul Barwell highlighted the ending of levy exemption certifi- cates for renewables in August as an example: "If you remove that levy exemption certifi- cate, that has basically increased the cost of all those projects by nearly £5 a megawatt-hour. It happens to all exist- ing projects as well." Hullat said it did not matter whether or not the government saw a particular change as being retroactive as it was "in the eye of the lender or equity investor as to how changes impact overall sentiment". 3. Plot the way forward Again and again investors called on the government to provide the industry with a long-term game plan, laying out the broad direction of travel. Director of energy strategy and govern- ment affairs at Siemens Mathew Knight said the sector needed "a rolling forward view, published every year by Decc, endorsed by the Treasury and by the National Infra- structure Commission, and embraced by the whole industry… Nobody is aer cer- tainty, but just clarity of direction allows investment." Investors appealed for a decision to be made on the future of the levy control frame- work (LCF) beyond 2020, saying it provided a useful tool for seeing how much government money might be available for renewables. Morgan Angus, principal at the Townsend Group, said the government should also give more details on how the LCF budget is cal- culated "so that when something happens in the market people can understand how that is likely to feed through, and start pricing that in way, way, way before any sort of gov- ernment announcement is made". 4. Don't play party politics The use of energy policy as a political foot- ball and the lack of a consensus between parties was identified by investors as the root cause of many other concerns. They said party politics was hindering long-term planning and leading to large swings in policy whenever a new govern- ment came to power. Knight told the com- mittee it did not mat- ter if one government pledged to support a particular set of technologies, because the next government could "come along in the future and say, with equal lack of justifica- tion, exactly the opposite". He highlighted Europe as a counter exam- ple: "They are a lot more consensual and technocratic in the way they view energy policy. Here in the UK, it is a much more par- tisan thing and it has become a much more adversarial thing over the years." 5. Don't cut and run With the Renewables Obligation for onshore wind set to end in April this year and energy secretary Amber Rudd saying it is not likely to be eligible for contracts for difference (CfDs) in the future, investors appealed to the government to provide the technology with some kind of support. One suggestion was subsidy-free CfDs. Octopus Investments' Hulatt said: "I think the onshore wind sector is looking to see what Decc is going to do in terms of the mar- ket stabilising CfD and whether that comes forward as a viable mechanism for support." Boosting investor confidence Potential energy investors have been lining up in front of MPs to bemoan the investment landscape in the UK. Tom Grimwood lists the top five things they say would encourage them to dig deep. " In the UK, energy policy is much more partisan than in Europe, and it has become a much more adversarial over the years. "

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