U.K. plans to cut investments in high-carbon energy

U.K. plans to cut investments in high-carbon energy

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An oil rig in the North Sea off the coast of Scotland.

The last time the British government released its national infrastructure pipeline, it prompted an outcry across the green economy, as business leaders were left shocked by the dramatic shift from a distinctly green pipeline of projects in 2012 to a 2014 plan dominated by investment in fossil fuel energy infrastructure.

This time around, the latest infrastructure delivery plan (PDF) and pipeline released by the government last week reveals a slightly more nuanced picture. In short, neither high carbon nor low carbon infrastructure developers are likely to be that happy at the results.

The official pipeline documents show high-carbon projects will have captured 41 percent of total investment in 2015, while low-carbon projects will have secured 33 percent.

However, by 2020 the focus is expected to have shifted firmly back to greener projects when 51 percent of total infrastructure spending will be low-carbon and only 30 percent will be classified as high-carbon.

But the real story from the release, revealed by analysis from the think tank Green Alliance, is the dramatic change in sentiment amongst private sector infrastructure investors over the last decade.

Compared to the 2014 data which revealed a private investment drive into oil and gas, by 2020 private investors will be exiting high-carbon projects in their droves, explained Dustin Benton, head of energy and resources at Green Alliance.

"The private sector is basically getting out of high-carbon stuff," he told BusinessGreen.

Benton's analysis shows private sector spending on high-carbon projects will fall by over half by 2020 as investors pull out of oil and gas projects in the North Sea.

He suggested that although the decline of North Sea oil and gas is one of the main drivers behind the trend, the high-carbon exit is also likely to have been reinforced by the outcomes from the Paris Summit, which commits the U.K. to a delivering a net-zero emission economy by the end of the century. 

However, while a private sector wary of high-carbon investments may be a sign that the "stranded assets" theory is really starting to hit home amongst investors and asset managers, this does not immediately translate into good news for the green economy.

According to the government's projected pipeline, the private sectors' retreat from high-carbon projects is not being matched by a corresponding rise in low-carbon investment — put simply, the money is not being moved from high-carbon to low-carbon. Instead, it is being taken out of the system altogether. By 2020 overall private sector investment in new infrastructure in the U.K. will have fallen $14 billion a year.

The primary reason for this projected fall in investment is the uncertainty surrounding future energy and climate policy, according to Benton.

"The challenge for the chancellor is that if we want to continue to have a large investment pipeline, if we want the GDP growth that comes from that, then really we ought to be replacing that private sector investment being lost from high carbon infrastructure by pulling it into low-carbon infrastructure projects," he said.

As it stands, investment in low-carbon electricity is set to peak at $19.6 billion in 2017, driven by $8.5 billion of private sector investment in offshore wind and $6.54 billion of investment in electricity networks.

But by 2020 total low carbon electricity investment falls to $1.42 billion, comprised mainly of investment in regulated network assets and the Hinkley C nuclear power station, assuming a final investment decision is finally delivered as promised.

Meanwhile, spending on renewables is set to drop dramatically to $338.5 million by 2020, a 96 percent fall from its 2017 peak, which Benton attributes to the "desperately unclear" fate of the Levy Control Framework — the U.K. government's budget for clean energy subsidy spending post-2020.

"The result is that private sector investment overall is falling by a third, and although public sector investment is rising slightly it isn't going to cover the gap. The net effect will be lower overall investment, lower GDP," Benton warned.

The government's official infrastructure pipeline effectively confirms what renewable energy developers, green businesses and campaigners have been warning ever since the government torched a host of clean energy policies last summer: the industry is staring down the barrel of a development hiatus which will put the U.K.'s renewable energy and emissions targets at risk and push up the long term cost of decarbonisation.

Glimmers of hope are on the horizon. In his budget speech earlier this month Chancellor George Osborne confirmed a further $1.3 billion of support will be made available for offshore wind projects through the government's auction process.

As a result a number of projects are expected to secure price support contracts before coming online in the 2020s. Benton said the move by the chancellor was the minimum the government needed to do to ensure no "unrecoverable hiatus" in the offshore wind sector.

Meanwhile, the Department of Energy and Climate Change is widely expected to deliver a decision on the future of the LCF by the end of the year, when it has said it will set out its plans to get the U.K. back on track to meet its emissions targets for the mid-2020s under the fourth carbon budget.

There are also some encouraging signs energy efficiency and other demand-side measures are increasingly being recognized as integral to developing the U.K.'s green infrastructure.

The National Infrastructure Delivery Plan, released alongside the pipeline, includes energy efficiency and home insulation for the first time, raising hopes fresh measures to drive investment in a sector that has been hit hard by policy changes eventually could materialize.

The inclusion of energy efficiency in the plan was welcomed by members of the Energy Bill Revolution, an alliance of 200 charities, businesses, cities and unions that campaigns for energy efficiency to be made an infrastructure priority backed by government funding.

Director Ed Matthew called for the government to now use capital funds to kickstart infrastructure investment in efficiency measures.

"At last it has been officially recognized that making our homes energy efficient is a key part of Britain's infrastructure challenge," he said in a statement.

"But the cost is entirely placed on energy bills, making it impossible to set up a program at the scale needed to end fuel poverty and slash carbon emissions. ... There is now an overwhelming case for the government to use capital funds to create a world leading energy efficiency program which could leverage billions in private investment to end the U.K.'s cold home crisis."

The modest step forward on energy efficiency was also matched recently by the chancellor's confirmation in the budget that he will accept the National Infrastructure Commission's recent recommendations for increased investment and new policies to accelerate the development of smarter energy infrastructure.

But if the latest infrastructure plan suggests a slightly brighter picture for low-carbon investment compared to its unashamedly high-carbon predecessor, a closer look reveals an underpowered infrastructure pipeline that is struggling to attract private sector investment and appears in no way commensurate to the targets agreed in the Paris Agreement, nor the requirements of a modern, resilient, low carbon economy.

The pressure on the government to deliver the clean energy policies necessary to drive much needed investment has never been more acute.

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