Peter Atherton, the head of utilities research at UK broker Liberum Capital has issued an extraordinarily damning assessment of UK energy policy. The good news is that he reckons the lights may not go out. The bad news is that he thinks that this will be because of a "huge spike" in energy prices. This will of course extinguish much of the UK economy.
Here are a few of the highlights in the report.
UK energy policy is not plausible...
The Energy Bill ...effectively re-nationalises the investment-making decision process in the power sector. But it is not clear that policy makers yet appreciate that this also means that the risks and costs associated with these decisions must also transfer to the public.
...we identify a number of possible triggers [for a crisis]; a generation capacity crunch in the 2014-17 period leading to a sharp spike in power prices, a lack of dispatchable generation by the end of this decade onwards, and spiralling consumer costs/developer profits that a future government will find untenable.
...political risk looks certain to rise sharply in the UK energy space in the coming years as the implausibility and contradictory nature of policy is exposed by events. We welcome recent moves by both Centrica and SSE to take a more cautious approach to allocating capital to UK renewables. UK utility stocks have benefited in recent years by being viewed as having relatively low political risk, this may well change in coming years. Most exposed will be Drax, SSE and Centrica.
UK energy policy is effectively a massive long position on the oil price i.e. if the world does indeed face sky high oil prices in coming years then the policy will be seen to have worked. But even if this bet proves correct will we see much benefit? The answer is probably not unless the rest of the world follows the UK’s lead.
The idea that the Energy Bill transfers risk from the private sector to the taxpayer is a new one on me. The explanation is in the body of the report:
The government will replace the existing regime with a Contract for Difference (Cfd) mechanism. This new mechanism will very largely transfer the price risk from the developer to the consumer by guaranteeing an achieved power sale price for each power station covered.
As every banker knows, transferring risk from the private sector to the taxpayer is good for business but bad for the country and the taxpayer. For the government to go down this road again could therefore be seen as criminal.