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Q. What scale of investment is required in the UK energy sector?
The amount of investment required for the power sector to meet its Net Zero ambition will be unprecedented with low-carbon new-build generation alone predicted to require between £300-340 billion in addition to £30-40 billion of new transmission network assets out to 2050. Consider as well, the worst-case scenario cost, as assumed by the National Infrastructure Commission, for decarbonisation of heat at £450 billion along with the funding needed for essential energy efficiency improvements in homes and commercial buildings and Electric Vehicle (EV) infrastructure and the huge scale of investment required is evident.

Q. What does the utility sector offer to investors right now?
Great Britain benefits from a stable regulatory regime and legal framework, attributes which make it a good place to invest – something which must be maintained as we work towards Net Zero. Low-carbon generation is also very attractive to investors in the current environment as the revenue support mechanism, the Contracts for Difference scheme, provides a long term, stable return to investors - although there is a risk in securing a contract through the competitive auction process. Importantly this element of competition ensures the clearing price is reflective of the market. The most recent allocation round cleared at £39.65/MWh, almost £20/MWh less than the average day-ahead wholesale price in 2018/19, providing good value to the bill payer.

There are also opportunities for returns in the GB wholesale market and stacking ancillary services, but it does require an appetite for risk and it can therefore be a challenge to build a solid business case for new energy resources. The Capacity Market has provided certainty to investors in capacity that contributes to security of supply - including generation and Demand Side Response that would otherwise struggle to compete against intermittent generation with low running costs.

Q. How has the shape/nature of the utility industry changed financially?
The way in which we invest in large infrastructure assets has changed over the past decades with debt finance becoming the preferred option. As a developer, investing only a proportion of equity into the overall project spend, and then seeking debt in order to complete the finance of the asset allows further liquidity in a developer’s capital to invest in further projects and assets.

Q. Where do you see it heading over the coming decades?
Developers will continue to look for the correct balance between equity and debt to allow them to invest in more projects by increasing capital liquidity. They will focus on a large build-out of renewables, but also a solution to flexibility that is zero-carbon - either with the addition of Carbon Capture Utilisation and Storage or clean burning fuel such as hydrogen. With a projected increase in domestic energy bills of between £100-300 per year for decarbonised heating alone, according to the National Infrastructure Commission, decreasing consumption through energy efficiency will be the key to keeping bills affordable.

The question is though how the required measures should be funded? Through taxation - or through energy bills? And with the increasing proliferation of EVs, how do we finance the required infrastructure, and who owns it? This could be an opportunity to allow investors to invest their capital and take the initial capital expenditure hit away from the consumer. We also envisage an opportunity for return through EVs providing flexibility to the electricity system, which should be appropriately rewarded.

Q. What are the main challenges/issues facing utilities and their investors?
The challenge is providing reassurances to investors looking for stable return from an increasingly volatile market, and providing them with acceptable risk. Without solid policy direction and regulatory certainty, this will be impossible. The Contracts for Difference scheme must continue to keep up the good work bringing renewable generation to market but we also need to ensure that there is a suitable revenue guarantee mechanism for flexible generation to fill in the intermittency gaps of renewables, while also making the operability of the electricity system manageable. This revenue guarantee acts to de-risk from market cannibalisation. In terms of developers and utilities, post-Brexit, the lack of access to the European Investment Bank may become a barrier, particularly when seeking junior debt. Private junior lenders often ask for higher interest returns than state-owned investors require so this may need to be addressed. However, this also offers a great opportunity for private investors. If there is a clear policy and regulatory framework, investors will invest their capital, but only if the risk is acceptable.

The overarching issue though is that there are a few solutions being brought forward to meet decarbonisation targets, however, the policy direction hasn’t been set as yet, so there is risk in picking the right winner for investors.

Q. Why is the Utility Week Investor Summit important?
The UW Investor Summit provides a key opportunity to bring together investors and utilities, improving relations and understanding of the barriers to investment in the energy market. Only through coming together, can we develop an environment that incentivises investment in the energy market and ensure that our crucial industry does not stand as a barrier to Net Zero.