I awoke last Friday morning to find that the UK had decided to exit from the European Union (EU).
I was a bit shocked to say the least. I then went to breakfast to meet an enraged Irishman who had just lost a small fortune because of the investments he had made in UK solar development. His immediate reaction was that he would not be able to build those assets, given the collapse of the pound, which makes the cost of solar modules and inverters prohibitively expensive, and thus the projects nonviable.
My next meeting was with a German utility which is also developing renewables assets, as well as owning and operating them, in the UK. These so-called assets are now close to generating negative cash flows in euro terms (because of the fall in value of the pound). If the utility sells, they will make a loss on them.
Brexit also impacts me directly. My business Alexa Capital is a corporate finance business which facilitates capital flows in and around energy infrastructure as well as raising capital for growth companies and helping companies with mergers and acquisitions. All of this has now become more difficult.
The UK needs to replace a large part of its aging energy infrastructure over the next years if it wants to keep the lights on. The issue now is that investment decision makers don’t like uncertainty, especially when they are investing in assets that need to be in place for the next 20-40 years. Here are the some of the risks, as I see them:
- Currency – Much of the new power generation infrastructure put in place in recent years in the UK has been financed by foreign capital from energy companies such as Electricity Ireland, Vattenfall and Statoil, and financial institutions such as the Bayern LB and MunichRe. There are now big questions marks about their willingness to continuing investing in UK pound assets. The continuing falls in the value of the pound will not only cause foreign capital to think twice about investing in UK energy. It will also push up oil, coal and gas prices, which should in turn push up energy prices for the consumer.
- Policy uncertainty – We do not know whether the UK will continue to implement the wide range of European directives (such as Renewable Energy, Large Combustion Plant and Energy Efficiency directives), which have pushed much of the investment in UK energy in recent years. In fact, we have no idea what the energy policies of a new UK government will be.
- Large infrastructure projects – The biggest risk must be to new nuclear, with serious questions around the ability to finance the Hinkley Point nuclear project, which relies on inward investments from the Chinese and French. Even if that is sorted, let us not forget that the project is already delayed, it won’t go online for another decade, and if it does, the UK consumer will be paying 3x the current UK wholesale power price for that electricity. In other infrastructure projects, the prospect of new inter-connectors being built into Europe has fallen, which means that there will be less competition amongst power generators in the UK. My colleague, Gerard Wynn, has written on the risk that Britain, like Switzerland, is now frozen out of EU negotiations on the cross-border coupling of electricity markets. This again implies that consumer bills will go higher.
What does this all mean for UK energy? We will see little new investment until a new government is formed, and beyond that, until the new government sorts out where it wants to go with its energy policy. That will only increase the likelihood of the lights going out. And even if they do stay on, it may be more expensive for the UK consumer. The prospect of falling inward investment may in turn put pressure on governments to reverse a ten-year move away from coal to cleaner sources of energy such as wind and solar.