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UK risks losing out in renewables investment race

Author: ICAEW Insights

Published: 13 Mar 2023

Policy uncertainty and increased international competition are causing an investment hiatus that will lead to higher bills, increased emissions and continued reliance on fossil fuels, experts warn.

The UK is gambling its position in the race to become a global renewable energy leader due to its uncompetitive investment landscape and policy uncertainty, according to energy experts.

Both the US and the European Commission have recently unveiled billion-dollar investment plans to boost renewables and ensure future energy security to meet their net-zero goals. The US and EU green initiatives will put the UK at a significant disadvantage unless the government acts soon. 

According to research by Energy UK, between now and 2050 an estimated £500bn in additional power sector investment is required to meet the UK’s net-zero goals, meaning that private sector funding will be crucial. The group also warns that the investment opportunities for low-carbon generation has deteriorated significantly in recent months, threatening to undermine the UK’s climate change targets, its energy security and wider economic growth.

Energy UK’s new report, Storms approaching: How to prevent an investment hiatus in UK low-carbon generation, warns that international investors are reconsidering where they invest because of rising inflation, interest rates, supply-chain difficulties and increased competition from the US and EU.

The trade association warns that an investment hiatus in low-carbon generation will lead to higher energy bills for longer, increased emissions, and continued reliance on volatile and expensive international energy markets. 

Energy UK Chief Executive Emma Pinchbeck says: “The UK is in increasing danger of undermining its own ambitions and failing to deliver on its commitments. In many ways, the UK has led the way in the transition to clean energy – witness our world-leading offshore wind industry – but we risk squandering this position and driving the investment that we need elsewhere.”

The report says the UK’s poorly designed windfall tax is putting off investors concerned about the viability of new clean energy projects, particularly renewables. “The knock-on effect for new low-carbon generation is that overall costs have increased by a staggering 20-30%, with some developers reporting cost increases of up to 50% for specific projects. 

“These cost increases are compounded by systemic regulatory uncertainty and lengthy delays to planning and grid connections, which hold back new projects from being built quickly,” according to the report.

Immediate fiscal rethink

Ahead of the government’s Spring Budget, however, the energy body says that it isn’t too late to safeguard the UK’s role as a clean energy superpower – but it would require an immediate rethink of fiscal policy. 

There are measures that the government could take immediately, the report says. These include rethinking the electricity generator levy (EGL), by including an investment allowance consistent with the treatment of oil and gas extraction; reforming the capital allowance regime to provide enhanced incentives for low-carbon investment and maximising capacity from future Contracts for Difference allocation rounds by addressing design issues and increasing the budget. 

Jo Butlin, Chair and CEO of energy consultancy EnergyBridge and a member of ICAEW's Energy and Resources Group, says: “Most investors are looking at investment in energy infrastructure, which requires confidence in long-term (25 years+) bankable earnings. 

“The UK was very successful in the 2010s stimulating investment through some of its grandfathered schemes, such as the Renewable Obligation and Feed In Tariffs. However, since these schemes were guillotined, there has been a vacuum in widespread support for many technologies and increased exposure to highly volatile merchant markets. A history of flip-flopping with policy and tinkering with market design has exacerbated the investment risk. 

“However, the fundamentals still provide the UK with a fantastic opportunity to take a global lead and investor capital is available,” Butlin says. She believes the newly formed Department for Energy Security and Net Zero gives some hope that this opportunity has risen up the priority list for the government. “But there is a need to give some clear and stable signals quickly in order to avoid capital migrating offshore,” says Butlin, who is also a Non-Executive Director at Thrive Renewables.

Besides the EGL, Energy UK also recommends implementing changes to the capital allowance regime to boost investment incentives, such as extending capital allowances rates and the annual investment allowance for qualifying renewable projects from £1m to £20m, among many others.

Pinchbeck says: “We are at a pivotal point right now, with other countries actively trying to attract the same companies and investors and it would be unforgivably complacent to think that we don’t need to do the same. This is a once-in-a-generation opportunity and if we don’t seize it now, we will miss out not just on cheaper, cleaner energy, but on the huge boost to our economy such investment will bring in terms of growth, jobs and other benefits.”

Simon Gray, Head of Business, ICAEW, says: “The anniversary of the Russian invasion of Ukraine and the subsequent impact on world energy prices is a timely reminder that energy security and stability are top priorities. The creation of a standalone government department with the remit of energy security and net zero is testament to this and links both the geopolitical and sustainability arguments for a focus on renewable energy. Critical to this are solar, wind and other sources of green energy along with the creation of an environment that encourages investment. 

“This environment must comprise planning, funding, supply chain and numerous other considerations, but centre stage must be easily understood and simple to navigate. ICAEW’s vision is to enable a world of sustainable economies and our members who operate across a broad range of industry sectors, including renewable energy, have an important role to play.”


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