The global economic downturn has created some of the most challenging trading conditions in 20 years and has also reduced demand for energy as economic output across the country has faltered.
An unexpected, but opportune, side-effect is the extent to which the recession may actually help to lower the financial hurdle that the UK must face in meeting its challenging 2020 energy and environmental targets.
We at Ernst & Young have analysed the situation and suggest that there is now an opportunity to reduce future investment in energy infrastructure by as much as £35billion to 2025.
The Government has committed to having 15% of overall energy consumption (that is, electricity, heat and transport) from renewable sources by 2020, as well as cutting greenhouse-gas emissions in the same year by 34% from 1990 levels.
Both targets will mean huge changes to the way we currently source energy: windfarms, biomass and other types of renewables will be needed to generate a large proportion of the energy we use, with new nuclear and carbon capture and storage technologies also helping to reduce carbon emissions from electricity generation.
However, making these changes will not be cheap. In February this year, we calculated that over £230billion of investment in energy infrastructure would be required for the UK to meet its low-carbon and renewable-energy goals. Much of this investment will need to be made in and around Scotland.
In addition to the construction of onshore and offshore windfarms, with the latter drawing on many of the skills developed by the North Sea’s oil&gas industry, transmission links will have to be strengthened so that renewable electricity generated in Scotland can be sold to customers farther south.
However, by embracing energy-efficiency measures to reduce overall demand, we could help to slice as much as £35billion from the overall bill.
The recession has seen a significant reduction in UK energy consumption, with the latest estimates suggesting that the annual demand for electricity and gas has fallen by about 5% and 6%, respectively, year on year between 2008 and 2009. This has led us to reappraise the situation.
We believe that the lower levels of annual demand we are now witnessing offer an opportunity to embed change that could not have been anticipated only 12 months ago.
If gas demand in 2020 could be cut by 7% from its 2008 level and demand for electricity in 2020 held at its 2008 level, we have estimated that the overall investment requirement for energy infrastructure would then be reduced from £234billion to £199billion.
The falls in annual energy demand caused by the recession have made this easier to achieve. But we need to seize the opportunity and act now.
The challenge faced is to make sure that, when economic growth does return, it is not automatically accompanied by the same increase in energy consumption that we would normally expect.
This will require the aggressive adoption of energy-efficiency measures across Scotland and the rest of the UK by businesses and households alike. Lasting behavioural change will be needed. However, the recession has made this more likely – it is encouraging all of us to look more closely at our energy consumption as a potential source of cost savings.
The Government is already looking to accelerate the deployment of insulation measures – there are estimated to be more than seven million homes with unfilled cavity walls and well over 10million that would benefit from further loft insulation.
But the scale of energy saving required implies far more. Solid wall insulation will need to be made cheaper and easier to install; and we will all have to get used to new technologies – such as micro-generation, smart meters and heat pumps – being deployed in our homes.
At the same time as accelerating the roll-out of energy-efficiency measures, we will have to increase the rate of deployment of all low-carbon technologies, from renewables to nuclear.
Overall, we believe that £90billion of investment needs to be made across the energy supply industry by 2015, or well over £13billion a year. This level of investment, if secured, could support up to 140,000 jobs in the industry and up to £10.5billion of incremental economic benefit.
For this level of investment to be made, crucial decisions setting the investment framework for the projects that will deliver the 2020 objectives have to be made by 2011.
Given the long lead times typically involved, many of these projects will need to have commenced, and a significant level of investment will have to be incurred well before 2015.
The years to 2015 will be absolutely critical in determining whether the UK can get close to meeting its 2020 commitments and therefore be on track towards even tougher targets that will apply thereafter.
For the investment community to have sufficient confidence in making large-scale capital expenditure, key risks need addressing which could otherwise inhibit investment in the energy sector and jeopardise the likelihood of the UK meeting its energy goals.
The most significant are likely to be supply-chain failures; planning hold-ups; policy/regulatory risk, and the viability of project economics.
In essence, the policy framework has to give confidence that the industrialisation of the energy supply chain will be possible, that the planning regime will be more predictable and transparent, that energy policy itself will be subject to the minimum level of change necessary and that project returns will be sufficient to cover financing costs.
Should the risks not be adequately mitigated, our analysis suggests that investment levels to 2015 could fall well short of what is required and the UK would, as a result, risk missing its longer-term energy goals.
With so much to lose if the investments identified above to 2015 are not made, it is clear that momentum needs to start ramping up from today.
Our greatest error would be to waste this opportunity by treating it as a breathing space, a welcome pause along a difficult journey.
Otherwise, the window of opportunity will gradually close, meaning that delivering on the UK’s energy goals becomes ever more difficult, and also expensive, to achieve.
Duncan Coneybeare is with Ernst & Young’s power and utilities team
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