The Challenge Of Energy Infrastructure: Energy, Security, Decarbonisation, And Affordability

The UK energy system faces a number of challenges as existing infrastructure closes, domestic fossil fuel reserves decline, and the system increasingly requires adaptation in order to meet low carbon objectives.

Changes are required to ensure that the UK has a secure energy supply in years to come and, already, the threat to supply security has been brought to the top of the agenda this year due to the political troubles in the Ukraine.

Background

The UK government has recognised that changes are critical to maintain security of supply and deliver the energy people need, where they need it. In its own words "Large-scale investment is required in order to achieve security of supply as the UK makes the transition to a lower - carbon economy"1.

This is reflected in the fact that GBP 147 billion of the total GBP 375 billion required investment in the National Infrastructure Plan (NIP) is earmarked for electricity generation. In fact there is a view that this may not be enough. A joint report by the London School of Economics (LSE) and nPower suggests that the energy sector needs record levels of investment of up to GBP 330 billion by 2030 if security of supply is to be achieved while carbon emissions are reduced. This in turn would enable the UK to achieve the EU's long term 2030 emissions reduction target.

Where is the energy investment required?

HM Treasury's "National Infrastructure Plan: finance update March 2014" (Treasury Update) accepts that the historical model of large utilities financing electricity generation on balance sheet is unlikely to deliver the scale of investment required. This is particularly the case when the traditional utilities are seeking to reinforce their balance sheets through asset sales and cuts in capital expenditure2. As a result, the way forward must include project specific investment in the electricity sector with finance through separate vehicles where the return is directly related to the performance of specific electricity assets.

The Treasury Update gives a useful summary of where investment is required and the total value of projects (by technology type) which are in the pipeline for the period up to 2020 (excluding those in construction or already part of an active programme.)

Nuclear

It is no surprise that a sizeable chunk of funds are required for Hinkley Point C, which is the first nuclear plant in the nuclear renewal programme regarded as essential to ensuring that the UK has a secure and low carbon...