Annex 1: Note from roundtable meeting
The Committee held a roundtable discussion with representatives
from financial institutions on 25 June 2012. Participants represented
a range of different types of organisation, including large collective
investment schemes, commercial banks, private equity and infrastructure
fund managers, and analysts.
The aim of the meeting was to explore some of the
likely impacts of the Electricity Market Reform proposals in the
Draft Energy Bill on investment decisions and to gain a better
understanding of what changes (if any) would be required to secure
the levels of investment that are needed to meet our low-carbon
and energy security objectives.
The discussion covered a wide range of topics. A
summary of the key points is given below.
Are the current proposals investable?
"I have not spoken to a single other investor
who thought that the publication of the draft Bill was a positive
step forward."
"The policy is on its way to a train wreck."
"There is an assumption that £100 billion
will be invested in the UK. Where will this come from? […]
This question of where the money will come from has not come close
to being addressed."
Participants agreed that the EMR proposals in their
current form were uninvestable. Two main problems were highlighted:
first, the proposals are too complex, especially in comparison
to the policy landscape in other countries like Germany. Second,
participants had serious reservations about the proposed structure
of the Contracts for Difference (CfDs) (See below).
Some participants thought that it should be possible
to fix the problems with the draft Bill and believed that stopping
the process now was likely to cause even more difficulties. Others
were less optimistic about the prospects for the Bill, suggesting
that at best it could be improved but that it would never work
especially well.
Several participants also said that the proposals
were based on the assumption that the money will be there and
that it is just a matter of tapping in to it. They argued that
this assumption was incorrect and that in fact, there was no evidence
that the money will be there on the scale that is needed. It was
noted that none of the big utilities across the EU are making
plans to invest at the moment (beyond replacing existing assets)
because their "balance sheets are broken". Therefore
we are asking them to "go from zero investment to massive
investment", which is unlikely to work.
Government engagement with the
finance community
"DECC doesn't listen properly."
"It feels like there are different departments
with different agendas. It feels unwieldy."
"From the outside it looks as if the CEO and
the Finance Director are disagreeing. Who wants to invest against
that?"
Whilst participants observed that there had been
quite a lot of discussion with DECC, frustration was expressed
about the nature of the engagement, per se. One participant suggested
that their discussions with the Department often seemed to be
at cross-purposes, while another felt that their conversations
did not appear to flow through properly into conclusions.
Another frustration was that there is not enough
detail available on the proposals, particularly the structure
of the CfD. Participants said it was not sufficient for DECC to
promise more detail at a later date because there was a danger
that by passing the Bill now, we could lock ourselves into channels
that have not been properly thought through and which could therefore
cause significant problems further down the line.
Very few of the participants had spoken to the Treasury.
There was agreement that although it had not really been necessary
in the past, the Treasury should now be more actively engaging
with the investment community.
There was a perception that communications between
government departments was poor and that in fact there may be
some conflicts between agendas. This situation creates uncertainty
and risk for investors.
Making CfDs work
"The synthetic counterparty must be changed.
Access to a CfD must be changed. Access to market must be changed."
"If it had a government counterparty, it could
possibly deliver."
"The problem of route to market means this is
a Bill for the big boys. […] It won't work for the little
people. […] Small generators will be wiped out."
"Some risks are binary; if there is no counterparty,
we won't invest."
Three big problems with the CfD model were identified:
- The majority of participants agreed
that they had originally been led to believe that the CfD would
be guaranteed by the State. The shift towards a new "synthetic"
counterparty model has introduced significant problems. None of
the participants thought that the model as currently planned would
be bankable. This was because there was uncertainty about whether
it would be legally enforceable and because it was seen as being
too complex for big investors.
- Participants also noted that developers could
not be certain that their project would get a CfD. It was suggested
that there was a balance to be struck between handing contracts
to anyone who said they wanted to develop a project and only awarding
a contract at the point of final investment decision. It was suggested
that the solution would lie somewhere between these two extremes.
- Route to market is also a concern. It is not
clear whether all projects will be able to achieve the reference
price. One participant suggested that the outcome of the proposals
as they are currently formulated would be that smaller scale players
would be squeezed out, leading to greater vertical integration
in the market.
Some participants were not convinced that the CfD
model would attract investment and argued that ultimately, the
State would need to put its balance sheet behind big investments.
There was also some support for a Regulated Asset Base model as
an alternative.
Capacity mechanism
Although many participants liked the idea of a capacity
market in principle, some felt that it was difficult to design
a mechanism that worked well for anything other than large, diversified
utilities.
Political leadership
"I don't believe DECC's figures on the costs
to consumers."
"The reality is to achieve our climate change
and security targets, we have to pay. […] we need to be honest
about the cost."
"There is a need for political leadership. If
government wants investors we need to see the government standing
behind its decisions and to have a discussion with citizens about
proposals for energy sector. If the discussion is fair and open
we will trust their word is true. If not we will put you in the
same box as the European bailout countries - we won't believe
what you say."
Some participants expressed strong concerns about
the messages that Government is giving to consumers about the
likely impact of EMR measures on energy bills. There was scepticism
about DECC's published figures on future costs to consumers, although
it was acknowledged that it is very difficult to predict costs
because they depend on commodity prices. One participant noted
that it was even more difficult to forecast the costs of new nuclear
because so few have been built in recent years.
Participants explained that this was a concern for
investors because it introduces political risk - if consumers
are not willing to pay the additional costs for decarbonisation
and energy security, then Government may be forced to renege on
its commitments. Some participants highlighted the example of
Spain, where a tariff debt accumulated "because no-one wanted
to tell consumers they had to pay more on their bills".
The future role of gas
There was some disagreement about whether investment
in gas was likely to come forward. Some participants believed
that the investment case was strong, particularly because Great
Britain will need peaking plant in the future. Others, however,
pointed out that investment in gas at the moment is difficult
because the spark spread is currently zero. In addition, there
were concerns that the CfD might crowd out gas in the future and
therefore clarity was needed about the non-regulated part of the
market (i.e. the part not covered by CfD, capacity payments or
Emissions Performance Standard).
The future role of renewables
There was some disagreement about future prospects
for the renewables industry. One participant noted that share
prices in several listed renewables manufacturers had fallen dramatically
in the last few years. Another noted that some investment funds
in London were now closing down. However, others did not accept
this view, and noted that at a global level, investment in renewables
was healthy. They suggested that while the current economic climate
has reduced demand for renewables in Europe at the moment the
sector is not in inexorable decline.
There was also disagreement about whether the cost
reductions that had been achieved to date in technologies like
solar PV and onshore wind meant that now was a good time to invest
in renewables; or whether although moving in the right direction,
further cost reductions were necessary.
There was a further disagreement about the impact
of renewables on electricity system costs. One participant suggested
that the additional costs associated with providing backup generation
for intermittent renewables would lead to higher system costs.
However, another participant argued that this would only be the
case if the mix of generation was wrong. In addition, having an
optimum mix of generating technologies would take away costs associated
with the volatility of fossil fuel prices.
List of participants
1. Richard Budgett - RCM; analyst covering global
utilities
2. Julian Wolfson - Odey Asset Management - fund
manager
3. Daniel Roberts - Marshal Wace Asset Management;
fund manager
4. Maurizio Carulli - AXA IM - Resources and
Utilities Analyst
5. Graham Taylor - L&G - analyst covering
UK utilities
6. Cornelia Furse - Fidelity International -
analyst covering pan Euro utilities
7. Vantil Charles - Capital International - credit
analyst
8. Verity Mitchell HSBC
9. Jose Lopez HSBC
10. Monica Merli, Moodys
11. Peter Atherton, Citi
12. Nick Gardiner, Low Carbon Finance Group
13. Shaun Kingsbury, Low Carbon Finance Group
14. Kirsty Hamilton, Low Carbon Finance Group
15. Ian Temperton, Climate Change Capital
16. Orlando Finzi M&G Investments
17. Anne Wade - Capital International - fund
manager
18. Tim Yeo MP
19. Barry Gardiner MP
20. Dan Byles MP
21. John Robertson MP
22. Laura Sandys MP
23. Sir Robert Smith MP
24. Dr Alan Whitehead MP
25. Albert Owen MP
26. Dr Robert Gross, Specialist Adviser
27. Professor Derek Bunn, Specialist Adviser
28. Sarah Hartwell-Naguib, Clerk
29. Áine Ni Bhreasail, Committee Specialist
30. Jenny Bird, Senior Committee Specialist
31. Sarah Williams, Office of Tim Yeo MP
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