Labour leader Ed Miliband has decided to start a war with British energy suppliers, announcing major changes in the UK’s energy sector regulation if Labour wins the 2015 general elections. At the Labour Party’s annual conference, Miliband controversially announced a 20-month post-election energy price freeze. The response from the markets could not be clearer. Energy companies lost £2 billion of their share value as a result.
It is an indisputable fact that retail energy prices have gone up. This is due to several circumstances, but most importantly related to the hike in the both the wholesale price of energy and investments in energy infrastructure. According to a Committee on Climate Change report, these two factors contributed 62 percent and 16 percent respectively to rises in energy bills since 2004. Another 15 percent is linked to energy and climate change policies. The profits of the six big energy companies in the UK, who own most of the energy generation capacities in the UK, have gone up by a staggering 73 percent in the period between 2009 and 2012. However, in roughly the same period (2007-2011) investments into the energy sector have also increased by 73 percent.
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Still, it seems that when UK politicians focus exclusively on reducing energy bills, they are missing the point. The key problem with the UK energy sector is the lack of a consistent long-term energy policy. This shortfall not only damages the security and sustainability of energy supplies, but it also gives mixed and confusing signals to the investors.
Around 25 percent of the UK’s sources of energy generation will be closed in the next several years due to environmental constraints or age, and the current energy policy does not have a clear solution on how to replace them. According to a recent Lloyds bank report, the generation capacity downfall is imminent by the end of this decade. The Ernst & Young “Powering the UK 2012“ report emphasizes that the high level of investment in the energy sector in the period between 2007 and 2012 is a consequence of the commitments made in the period 2005-2009, when the government was delivering a clear and effective energy policy framework. The study gives an even more damning forecast for the future of UK energy by predicting a loss of investment momentum in the years to follow.
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In a similar tone, a CBI and KPMG survey voices fears of the UK’s business community that the country’s infrastructure will deteriorate over the next five years. In addition, the renewable energy sector covered only 11 percent of UK’s energy needs in 2012. The current increase in renewable sources most certainly will not be enough to cover the widening gap between supply and demand, since 70 percent of UK’s energy consumption still depends on carbon fuels.
The nervousness in energy companies and the business community in general caused by Ed Miliband’s unexpected energy manifesto is therefore understandable. The UK will need a £110 billion investment over the next ten years to satisfy its energy needs, and this investment will inevitably have to come from private investors eager to play by well-defined rules.
By Ante Batovic