The UK’s national energy policy needs to balance the often conflicting priorities of sourcing power from resources which are cheap, clean, safe, secure and reliable in supply, and sustainable.
Clearly, no single energy source meets all of these criteria.
Traditionally, carbon-based energy has dominated the UK’s energy mix with nuclear energy playing an increasing part since the 1950s.
In more recent times, increasing focus has been placed on renewables.
Over the last year, two huge world events have not only been high in human and economic cost but have moved the topic of renewable energy further to the fore.
These events are, of course, the explosion on the Deepwater Horizon rig, casting a shadow over the increasingly complex techniques required for deepwater oil exploration, and the earthquake and resultant tsunami in Japan, which has once again laid bare the potential risks inherent in nuclear power generation.
These issues, together with commitments from the EU Renewable Energy Directive, have led to an increased focus on wind, wave, solar, and biomass as energy sources, as well as carbon capture and storage.
As with any emerging technology, in order for a sector to develop under its own momentum, significant capital investment is required.
Securing investment from the state, however, is likely to prove challenging, given the UK’s fiscal constraints.
As a case in point, consider the green investment bank to which Chancellor George Osborne committed a further £2billion in his March budget, with the objective of “making investments in low carbon initiatives where the returns are too long term or risky for the market”.
Very commendable, but still a long way short of the £100billion estimated value of investment required if the UK is to meet its target of 15% of energy from renewables by 2020; basically a seven-fold increase from 2008 levels.
The green bank’s effectiveness is curtailed by the fact that it does not have the ability to borrow in the bond market which, in turn, would leverage up the volume of investment which could be made.
The UK Treasury will not currently allow this, given that such liabilities would sit on the government’s balance sheet at precisely the time when it is aggressively trying to cut the deficit. As such, securing private sector investment is likely to be crucial to the continued development of the renewable energy sector. This again comes with its own challenges.
Any industry which is heavily subsidised or indeed taxed will carry an element of political risk, as was starkly illustrated by the chancellor’s recent raid on North Sea oil & gas in the Budget. Investment in renewables also carries significant political risk.
Consider, for example, the announcement in February from Energy Secretary Chris Huhne of an immediate review of subsidies for solar energy projects, directly impacting on a number of specialist Venture Capital Trusts (VCTs).
Due to the various tax reliefs available, such schemes attract significant sums of private investment into solar as well as wind energy projects. The result of the subsidy review is that a number of VCT managers have had to change their strategies or withdraw their schemes altogether.
On European bourses, there are numerous examples of large cap quoted renewables investments which delivered bad experiences for private investors. Three years ago, Spanish utility firm Iberdrola listed part of its renewable energy subsidiary, with investors paying 5.30 euros per share in the IPO (initial public offering). In March of this year, following consistent share price underperformance, Iberdrola announced a buy back of the stock at 3 euros per share.
At a global level, the RENIXX index tracks the performance of the 30 largest quoted companies in the renewable energy industry. This is a global index with constituents from the US, Asia and the eurozone, spanning the spectrum of renewable technologies.
Since the all-time high of the index in December 2007, the RENIXX has lost 72% of its value through to the time of writing. Over the same period, the FTSE World Index has increased by 13.5%, illustrating the huge performance disparity between equity investment generally and equity investment specifically in renewables.
Renewables have an important part to play in the energy mix for Scotland and the UK. However, given that these can be intermittent in supply and that, in some cases, current technologies have issues with scalability, renewables need to be considered as part of a balanced portfolio of power generation.
It is important for policy makers to publicly recognise the continued importance of oil & gas to our local and national economy in terms of skills, jobs and tax revenue.
The UK’s energy security requires investment from both public and private sectors.
As such, policies on subsidies and taxation need to be clearly mapped out and derived under consultation with industry, in order to ensure that sustainable plans for investment may be made in all areas of the energy sector, be it carbon or renewable.
David Barclay is a divisional director at investment management and financial planning specialists Brewin Dolphin.
Past performance of shares is not a guide to future performance.
The opinions expressed in this article are not necessarily the views held throughout Brewin Dolphin Ltd.
No director, representative or employee of Brewin Dolphin Ltd accepts liability for any direct or consequential loss arising from the use of this document or its contents
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