Feature

Interview: is there still too much uncertainty for investors?


Gail Rajgor

Part 1. Having vented his frustration on the politics of UK renewables policy on the Renewable Energy Focus website, Altium's Adrian Reed gets more off his chest, talking in depth to Gail Rajgor.

This article was first published in Renewable Energy Focus magazine. For a free subscription, click here. This is the online version, and will be published in 3 parts.

When Adrian Reed says investors want “certainty, certainty, certainty”, in many respects it's nothing new. It's a message echoed across the board, by his fellow bankers, project developers, equipment suppliers, and more besides. But Reed stresses, ‘certainty’ is not a euphemism for a blank cheque on returns in the form of never-ending sky-high subsidies for renewables from governments.

“What do investors want? They want long-term visibility,” says the man who is head of energy, waste and renewables at international investment bank, Altium. “There's certainty, but long-term visibility is fundamentally what they want.”

For too long now, in the UK at least, they simply have not had it, he says. Rather, politicians appear to bicker between themselves about suitable support mechanisms and announce further consultations, rather than make any firm commitments they fear might unleash a public backlash (over the perceived high cost of subsidies).

“Why do we just keep meddling?” he asks. “We keep trying to sticky plaster over something, or come up with some sugar-coated carrot that we then withdraw…ideas that never get finalised nor get any sort of cross-party agreement.”

He continues: “The people who take the risks and spend the money up front, and will have failures and problems and teething issues, need to see that the market, by way of the legislation, is encouraging the development of future technologies, which will in time be commercial.”

The UK's renewable obligation certificate (ROC) regime is due to come to an end in 2017, replaced with a capacity-based regime based on so-called contracts for differences (CfDs). Announced as part of the Electricity Market Reform (EMR) proposals, how the new support system will work in practice and what the incentives will be have yet to be clarified however.

As he wrote in his July post on the Renewable Energy Focus website, this lack of visibility has left the renewables industry languishing in limbo. “The problem is, whenever something seems to be working very well, and whenever it seems the market is then making returns that the government doesn't like, or could be politically unpleasant, they start knee jerk politicking and running around trying to find how they can stop anyone making any money from it,” he says. “What we need is long-term incentives, like the landfill tax escalator, like renewable obligation certificates, to encourage the industry to go forward.”

He's far from confident about the future. “I have a big problem with the EMR” per se, he says, suggesting there is neither a sense of regulatory pull (as in the ROC regime) nor of legislative push (as in the landfill tax escalator) with it. “With the EMR, what they're trying to do is reverse engineer,” he explains. “They're trying to back-solve an equation that they think will mean they cap energy prices, but energy prices in the UK do not sit in isolation.”

As he says, energy is “not a UK-centric” issue. “It's a global issue and therefore policies have to take account of global trends, demands and risks.”

He warns: “I think the EMR, the CfD market capacity mechanism, has a very great chance of being overtaken by global geopolitical actions, markets and events, and just not work.”

Aggressive horizons

Even if the visibility afforded to investors were of an “aggressive” support mechanism whereby, for example, any related “premium” rates guaranteed for renewables electricity fell sharply year-on-year or even, he says, by say two per cent a month to reach zero in 36 months, it would be better than the uncertainty now hanging over the industry. “As long as people know what it is, you can plan around it, and the market will have to adjust,” he says. “People would be able to plan for it, and they would know the timing of their parameters for different projects.”

The UK's Landfill Tax Escalator policy, first introduced in 1996 to encourage the diversion of waste from landfill, represents a good example of the kind of aggressive, but successful, type of legislation Reed is talking about, he says. “You might not think that is a working model for renewable energy generation, but look at what it's done,” he says. “It has been a long-term piece of legislation which has increased [the rate of tax] gradually, year-on-year.” The annual escalation of the tax is £8 with the charge for 2012 at £64 per tonne of waste going to landfill, rising to £72 in 2013 and £80 in 2014.

“When it came in, it didn't look like it was having any effect, but over a while people were able to plan for it, and gradually put strategic plans and investment criteria in place to encourage investment,” Reed says, noting that much of that ‘diverted’ waste has been used to supply and thus kick-start development of the biomass and energy from waste sectors.

As an example, he cites a project in Greater Manchester, where approximately 275,000 tonnes of fuel created from the city's residual rubbish will be sent by rail to one of the North West's major chemical producers Ineos Chlor to provide energy for its plant at Runcorn, Cheshire. The fuel, created from waste in mechanical biological treatment facilities and via anaerobic digestion (AD) plants (operated by Viridor under its partnership with the Greater Manchester Waste Disposal Authority) will be converted into approximately 29MW of electrical power and 26 tonnes per hour of steam.

“That, as a model, works really well. It gets rid of waste, reduces landfill, provides a sustainable loop for all those fuels, and produces heat and power embedded with local geographies, in a very efficient manner,” Reed says.

Part 2 - click here.

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