UK renewables offer huge potential

With the publication of the Energy Bill, and detail of Electricity Market Reform proposals expected in the coming weeks, Rob Hastings, Director of Energy and Infrastructure, shares his views on the state of the offshore renewables industry in the UK and Scotland.

19 November 2012

London Array Offshore Wind Farm-3

We should stand back and look at what has been achieved in renewables across the UK. Around £20 billion has already been invested in the sector and capital expenditure continues at a rate of around £2 billion a year; highly significant by any measure. The sector continues to break new milestones and last month grid connected wind energy momentarily hit nearly 12 per cent of UK electricity consumption which was at that time exactly the same level as the entire UK CCGT (combined cycle gas turbine) fleet. Offshore wind is already the biggest source of foreign investment in the UK economy. There are about 30 mature investors in the sector, including the UK's big six. There is a confidence among overseas investors in the UK offshore renewables market that we sometimes ignore. Ernst & Young's investor confidence report puts the UK in the top two for offshore wind.

Admittedly, the global recession has had a material impact on big investors: capital is harder to secure and events like the Fukushima nuclear plant crisis, leading to the premature shutdown of the nuclear programme in Germany, had a big impact on utilities like E.ON and RWE. UK plc knows it is absolutely the right thing to do to invest in low-carbon infrastructure. The problem is the scale of capital required is truly vast and the UK economy on its own will struggle to find it.

However, all this can be overcome. With the growing scale of the industry opening up significant potential for cost reduction, investors are entering the sector. Pension funds and insurance companies are looking at the sector as a good inflation hedge on their liabilities in a world where there are very few places to find a safe haven for capital.

But to take advantage of this and secure the opportunities for jobs, growth and energy security that the sector offers, it is vitally important that government is aligned on energy policy. We need strong market signals and certainty for investors. Uncertainty will damage the sector's fragile confidence, both in operational assets and through the supply chain. The publication of the Energy Bill, expected this month, and the strength of the government's commitment to decarbonise energy, will be absolutely critical to investor confidence across the sector and the UK.

A year or two ago, industry was very much working off the coat-tails of government policy. The government was pulling the sector rather than industry pushing the agenda. But now industry leaders, the big six for example, have made short and long-term strategic decisions with regard to their investment strategy. They have made a significant commitment to renewables, with big capital sums allocated and they are not in a position to just stop spending. As such, industry pressure continues to build on government, to follow through and deliver its ambitions in the sector. This can only be a good thing for progress.

Scotland, in particular, is in a very advantageous position for long-term renewables strategy because of its wealth of resources. There is every prospect of Scotland becoming a massive exporter of renewable energy in future. The challenge will be in delivering the right technology to capitalise on the potential of Scottish resources. This is perhaps three years away for offshore wind and maybe a decade away in wave and tidal.

But innovation in floating turbines has the potential to accelerate Scottish renewables deployment very quickly. Recent trials show that these could be a lower cost solution, even in relatively shallow water conditions. The technology is not that complex and we could be looking at a fairly rapid transition to this kind of solution in the future. As for the rest of the UK, the challenge for Scotland is to attract funding at a time when revenue returns are 5-10 years behind initial investments.

So the UK is well placed to continue to lead the world in offshore wind and renewables development. There are major challenges, but also a big prize to be had for all parts of the UK; a prize that The Crown Estate is committed to helping secure. The key challenge at this moment is to get clarity from policymakers on where they see the sector going - providing a stable long-term environment in which investors can be confident. The publication of the Energy Bill in the coming weeks will be a key milestone on the road to achieving this.