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Energy incentives needed for shovel-ready projects

BY the Government's own calculations, the UK requires £200 billion worth of investment in energy infrastructure by 2020 if it is to keep the lights on and meet climate change targets.

The need for a clear strategy to attract investors and expedite major projects such as power plants is compelling. With one-fifth of UK electricity generating capacity due to close by the end of this decade and the infrastructure in a state of decay due to years of under-investment, power companies are naturally keen to develop new plants.

The key to what will amount to a revolution in British energy provision is the Coalition Government's Energy Bill published at the end of last year. It is designed to move the UK towards a green economy by providing energy investors with the certainty they need to back low-carbon projects. In addition to these long-term aims, the requirement for new infrastructure offers the benefit of providing large numbers of immediate jobs in a construction sector that has been so severely damaged by the recession. Yet there is a danger that delay in defining the details could result in a botched opportunity.

Keith Anderson, chief corporate officer of Iberdrola in the UK and head of ScottishPower Renewables, has put the problem in a nutshell in an interview with The Herald today. While there are between 10 and 15 power plant developments with planning consent in the UK (including Cockenzie in East Lothian), power companies cannot commit to such multi-million-pound investments until they know how the new funding mechanism will work.

This will replace the current renewable obligation certificates with contracts for difference, under which the Government will compensate companies providing renewable and nuclear energy if the wholesale electricity price drops below a certain level. If it rises above this "strike price" the generating companies will pay the difference to consumers. By bringing all low-carbon generation (both renewables and nuclear) plus carbon capture and storage technologies within a single framework for the first time, this provides incentives for an energy mix that offers security of supply simultaneously with carbon reduction.

Power companies have rightly welcomed this but remain cautious because of uncertainty about the strike price and lack of detail about the capacity mechanism, which will compensate owners of coal and gas plants to provide back-up power, for example in the absence of wind. The Energy Secretary, Ed Davey, has pointed out that over the next decade, the investment needed to upgrade the country's energy infrastructure will be almost half of the entire infrastructure investment needed in the UK.

Mr Anderson is right to urge that the earlier we move ahead the better. The mechanisms must be pitched correctly but renewing infrastructure will bring tangible benefits and help to meet the legal requirement of CO2 reductions. In addition, the opportunity to boost the economy through construction jobs on projects that are shovel-ready is one we cannot afford to miss.

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