Financing the UK Power Sector: is the Money Available?

 Dr Rob Gross, Imperial College, London

Dr William Blyth, Imperial College

The electricity sector needs to renew its ageing generation fleet, and shift towards capital-intensive low-carbon forms of generation. Over the past few years, various organisations and commentators have suggested that the sector may be unable to deliver, questioning whether there will be a sufficient flow of money into the sector to finance these investments. This report examines the evidence for these claims, looking at three key issues:

·     The size of the gap between required and current levels of investment,

·     The ability of energy companies to scale up their capital expenditures,

·     The ability of financial institutions to provide the necessary funds, and the mechanisms by which they might do so.

Estimates of the size of the investment challenge range from the DECC / OFGEM figure of £110bn by 2020 to between £200bn to over 300bn by 2030 from organisations such as National Grid, the Committee on Climate Change and London School of Economics. These scenarios are assessed on a like-for-like annualised basis to understand the reasons for any variations, and to compare them with recent investment history to provide an objective assessment of any investment gap.

Since 2009, investment has been scaling up significantly. Over the period 2009-2012, average capacity additions were 4 GW per year, with average annual CAPEX of £4.8bn. To reach the most environmentally ambitious scenarios, wind investment would need to scale up to around 3GW per annum (e.g. National Grid ‘gone green’ scenario), requiring an extra £2bn per annum.

Analysis of recent history therefore suggests that the gap may not be too severe (Figure 1). However, the study also carried out extensive interviews with key stakeholders in the financial sector to assess likely future trends. This showed that investor confidence in the utility business model is currently low due to the need for companies to rebuild their balance sheets having extended debt levels in the 2000s, and with current low wholesale prices damaging profitability most of the big European utilities are looking to rein-in capital spending.

The potential for alternative sources of financing are assessed in the study, indicating that whilst there are vast amounts of money held by ‘institutional investors’ (pension funds, insurance companies etc.), it is unlikely that more than around £1bn per year could be channelled into direct ownership of UK power generation assets under current regulatory model. Alternatives such as changing the regulatory regime, enhancing project finance conditions and other types of potential government interventions are assessed.