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UK's low-carbon policies are blocking investment

The UK's lack of a clear strategy for developing low-carbon energy is deterring investment in the sector and threatens to derail its carbon emissions reduction policy

Rupert Steele, director of regulation at ScottishPower, told a parliamentary committee that the government must clarify its policy on low-carbon energy generation post-2020."Investing in low-carbon electricity has the potential to boost the (UK's) economy, but there's been big political uncertainty over the last few years," Steele said. "By giving clarity to markets ... you drive costs down and having clear targets will mean we will require [fewer] subsidies. Companies like mine prefer to live in a world of no subsidies rather than ones which are volatile."

The government's new energy bill, released in November 2012, more than tripled its subsidy commitment to low-carbon energy generation from £2.4 billion ($3.8bn) in 2013 to nearly £10bn by 2021. But there was no clear indication of how the funds would be allocated to different power-generation industries and under what conditions.

Ernst & Young's latest Renewable Energy Country Attractiveness Indices say "political miscommunication and lack of consistency" over key energy reforms have damaged the UK's position as an attractive place to invest in renewable energy. Investor confidence has fallen within the onshore wind sector, in particular, the firm added.

ScottishPower has over 1,000 megawatts (MW) of low-carbon energy projects, such as nuclear and renewables, either in operation or approved. The majority of these are onshore wind-power projects in Scotland. The company aims to increase its renewable energy capacity in the country to 3,000 MW by 2015 and it hopes to become the first UK utility company to produce 10% of its energy produced from renewable sources. "As long as we get long-term clarity, [low-carbon energy sources] can be very effective. Many equipment manufacturers are now thinking about the next phase of investment beyond 2020," Steele said.

The government has said that around 20% of the UK's existing electricity generating capacity will be shut down over the next 10 years. This is because coal-fired power stations are being phased out under EU environmental regulations.

According to UK government data, the country needs around £100 billion of investment in new electricity generation and transmission by 2020, roughly double the current rate of investment. Older coal and oil plants in particular are being replaced by wind and biomass plants.

The UK power regulator Ofgem says that the risks to security of supply will increase over the next four years, despite demand remaining relatively flat, because of a fall in electricity production from coal- and oil-fired plants. The UK's electricity supply will tighten as margins, the amount of spare generation capacity in the country's electricity grid, could fall from 14% in 2012 to just 4% per cent in 2015-2016, according to Ofgem figures. The regulator said the UK could face an electricity shortfall of around 3,400 MW by 2015. 

According to government targets, renewable energy should make up around 30% of electricity consumption by 2020, up from around 7% last year. It is also promoting shale gas, having approved hydraulic fracturing last year. Nuclear power and carbon capture and storage technology also feature in its low-carbon power generation strategy.  

The UK's Department of Energy and Climate Change (DECC) said that it wants to cut the country's greenhouse gas emissions by 80% by 2050. But to do this it will also need to improve energy efficiency.

However, DECC has not yet set clear targets for energy efficiency savings, stating only that the country could save 196 terawatt hours in 2020 through investment in energy efficiency measures. This is the equivalent of around 22 power stations worth of energy, according to the government.

But Steele claimed the UK has "got it the wrong way around" by setting renewable energy consumption targets to 2020 without setting clear energy efficiency targets as well.

The European Union aims to save 20% of its primary energy consumption by 2020, but admitted in 2011 that member states' existing energy policies meant the bloc would achieve savings of just 10% in that timeframe.

Meanwhile, in the oil and gas industry, short-term investor confidence in the UK is high, but the outlook for longer-term projects remains uncertain because of poor exploration and production results, consultants Wood Mackenzie said. "The process of engagement by the UK government with industry has contributed to a return of some investor confidence and we expect high levels of development activity out to 2015," analyst Lindsay Wexelstein said. "However, the disappointing exploration results in 2012 raise concerns about levels of activity beyond that point."

Wood Mackenzie expects capital investment of more than £39m in the UK between 2012 and 2015, mainly because of new field developments and expansions at existing fields. But without improved exploration success, longer-term investment could be in jeopardy, the consultancy said.

Wexelstein said 2012 was "another disappointing year" for UK exploration. Although 66 new wells were spudded, a 40% increase on 2011, few discoveries were made. The Carnaby and Cormorant East discoveries, in the UK sector of the North Sea, were the only two finds made off the UK last year. The discoveries have estimated combined reserves of 20bn barrels of oil equivalent.

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