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REA publishes first ever industry confidence survey

Modest optimism short term, but some doubts over key policies. Overall score: 47%.

The REA has conducted this survey in order to better understand the current state of the UK renewable energy sector.

The survey takes place at a time of major policy upheaval for the renewable power and renewable transport sectors and follows several analyses suggesting that investment in the renewables project pipeline has slowed. This morning’s Financial Times [3] reported the concerns of REA members responding to the survey about the new Contracts-for-Difference mechanism under the Energy Bill.

Senior managers from 68 companies responded to the survey. Findings confirm the Energy Bill is cause for concern with 51% of renewables executives believing that Contracts for Difference will not be effective in bringing forward new renewable power capacity. 69% believe that the lack of an emissions target in the Energy Bill sends a ‘poor’ or ‘very poor’ signal to investors. Only 4% believe the UK has a ‘good’ or ‘excellent’ chance of meeting its 2020 renewable energy target.

However, the survey shows no significant overall deterioration in employment over the past six months. Just under a half of companies reported broadly stable employment levels and nearly as many firms recruited staff as have laid them off. Looking forward over the next six to twelve months 62% of companies expect employment levels to stay the same, and twice as many firms expect to see employment increasing, compared to those expecting a decrease in employment.

REA Chief Executive Gaynor Hartnell comments:

“We will repeat this survey every six months in order to build up a comprehensive picture showing trends in confidence levels. Billions of pounds of investment needs to flow into renewables infrastructure. Our aim is to provide Government and stakeholders with a tool to gauge how policies are being received.

“The UK has to achieve a higher growth rate than any other Member State in order to reach its 2020 renewables target. Mixed messages remain a problem and industry needs policy certainty and political consistency. The prize is up to 400,000 jobs by 2020, economic growth and greatly improved energy security.”

The REA has combined short term business outlook with confidence in meeting the 2020 target and confidence in the regulatory framework to give an overall ‘Renewables Industry Confidence Index’.

The ‘Renewables Industry Confidence Index’ score for this first iteration of the survey is 47%.

While 100% would constitute absolute certainty and a flourishing industry, we believe a score of around 75% would indicate a healthy and confident industry likely to meet the 2020 renewable energy targets. The UK has one of the lowest renewable energy targets in Europe at 15% of total energy, but also one of the most challenging given our low starting point.

The survey reveals serious concerns around Contracts for Difference, as set out in the Energy Bill, and dissatisfaction with the functioning of the Renewable Heat Incentive. It also makes key recommendations for improving investment going forward, including sending a clear signal to investors; ensuring CfD proposals in the Energy Bill work for independent generators; setting an RTFO trajectory to 2020; and introducing new RHI tariffs on time.

A selection of comments from survey respondents is set out below to illustrate industry perspectives.

General comments on UK policy and political landscape

An anonymous respondent from a leading UK manufacturer said:

“Too many conflicting signals have been given recently causing doubt as to whether the Coalition has a unified position on promoting a balanced mix in the future UK energy supply, including renewable technologies. There is also doubt that the Government is convinced that renewables have a long term role to play, and a widespread belief that HM Treasury has the upper hand in determining the ultimate rate of market adoption of renewables.”

An anonymous financier said:

“There is no shortage of capital for energy projects but it is an international market and many other countries are perceived as more predictable and trustworthy than the UK.”

Craig Ibbetson, Director of Regen Energy, said:

“Simplify the regulatory framework. It is too complex.”

James Astor, Managing Director at Agrivert Biogas, said:

“Recent Government actions mean that private equity and banks see Government renewable policy as a “risk” that has to be priced.”

David Williams, Chief Executive at Eco2, stresses that this uncertainty goes back further than the past six months:

“Investor confidence has deteriorated with the many changes in legislation seen in the UK over the last two years.”

Tim Jackson, Geothermal Development Manager at Sinclair Knight Merz, said:

“The UK is falling behind other countries in Europe and Africa in terms of attractiveness for investment in new renewable generating technologies.”

Energy Bill & Electricity Market Reform

The REA is not surprised that the electricity sector recorded the highest levels of ‘very poor’ confidence. The REA is currently urging Government to solve the critical route-to-market issue for independent generators, and will debate this issue at an open meeting on 27th March [5]. Independent generators are expected to deliver between a third and one half of necessary UK investment in the power sector to 2020. There is widespread concern that, as currently conceived, Contracts for Difference are not investable for independent generators. Ministers have committed to securing a solution and are expected to report back in June/July.

Andrew MacLellan, Director of ENER-G, said:

“Lack of regulatory and incentive stability, with a three to five year outlook, is proving a major obstacle to investment in the sector. Last year it was the RO review, this year it is EMR.”

Steven Edrich, Head of Strategy at 2OC, said:

“Continuing uncertainty over EMR and how the RO will be left to work beyond 2017 are crippling industry’s ability to look ahead and making it very difficult for banks to approve funding on projects now.”

Sector-specific concerns

There is more confidence in the small scale Feed-in Tariff than the Renewables Obligation or Renewable Heat Incentive. Overall, 65% of respondents in renewable heat and electricity had poor or very poor confidence in their sector’s regulatory framework.

Sam Tilley, Managing Director at Infinite Energy, believes the framework for solar PV is stable, but is concerned about delays to renewable heat policy:

“The continued failure to set the Renewable Heat Incentive for domestic renewables continues to cause uncertainty in the market. However on the plus side the commercial solar PV market is very stable at the moment which is driving business, and the launch of the new MCS Guide, which is very good, actually makes it a very nice environment to work in at the moment.”

One anonymous respondent revealed deep discontent with the treatment of new biomass power projects:

“The biomass energy sector seems to be under continual attack from government officials. The proposed cap on biomass capacity under the Renewables Obligation to 2017 has certainly stopped two of the projects I was personally involved with, both of which had achieved planning consent. Successive governments and ministers are all guilty of kicking the energy supply issue into the long grass.”

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