EU referendum and the impact on renewable energy

Mark Stewart

Mark Stewart

Corporate Finance Partner

With the country voting to leave the EU, the question now being asked is where does this leave the renewable energy sector? It is still early days and it would be premature to make any definitive statements. 

It is fair to say that the industry was in a state of uncertainty even before the Brexit vote. In a poll of business owners conducted by Cleanearth Energy prior to the referendum, when asked if they believed leaving the EU would be positive for business the responses were relatively evenly spread: 37% yes, 37% no and 26% don’t know. In a post Brexit environment there will be even more uncertainty which means that the industry will need more support from Government to rebuild investors’ confidence and encourage continued commitment to invest in UK renewable infrastructure. In a global fight for capital, investors will put their money into jurisdictions which are most stable.

As a country, we are still committed to the Paris agreement on climate change which has seen the UK Government set ambitious new targets to reduce carbon emissions by 57% from 1990 levels by 2030, a target far higher than the EU target of 40%. Given this commitment, this should be the perfect time for the Government to provide a secure and stable environment for companies, communities and individuals to invest in renewable energy projects. This is particularly in light of the recent Committee on Climate Change Report which estimated that as a result of the recent policy changes and continued policy uncertainty, that the UK will only achieve 50% of its target.

Time for reflection

Whilst the market is in a period of uncertainty and a degree of transaction hiatus, it is an opportune time to reflect on just how far the renewable industry has come from its inception in 2007 and to look at the opportunities that must emerge from a changed landscape. In 2007 the UK made a commitment to generate 15% of its total energy consumption from renewable sources by 2020. This was from a level of just 1.5% in 2005.  The Renewable Energy Directive in 2009, set out how the UK would achieve the target of 30% of electricity demand, 12% of heat demand, and 10% of transport demand being met from renewable energy sources. A range of policy measures were developed to promote the generation of energy from renewable sources, with the primary incentives being the Renewable Energy Obligation scheme (“RO”) in 2002 and the Feed in Tariff (“FiT”) scheme in 2010.

As a direct consequence of this policy support, by the end of 2015 total renewable energy installed capacity exceeded 30GW resulting in over 22% of the UKs electricity consumption being met from renewable energy sources i.e. well on track to meet its 30% target. However, in total energy demand terms only 7% was supplied falling far below the target of 15%, which suggested there was still considerable room for further investment and continued growth of the sector. 

It therefore seemed counter intuitive, that following the May 2015 general election, the UK Government significantly scaled back their support for renewable energy.  The most recent review, which came into play in 2016, carried the biggest changes which cut FiTs down to around 15% of their initial level, whilst introducing digression triggers and deployment caps. The RO was closed a year early to all technologies with its replacement - the Contract for Difference scheme - in a state of disarray. The underlying premise for the cuts was the protection of consumer welfare by keeping energy bills down.  It is therefore concerning that the Government is potentially committing to pay £92.50 per MWh (more than double the cost of onshore wind) for 30 years to support Hinkley Point C nuclear power station. There seems to be an apparent disconnect between those in power and the businesses and people they represent. “Lowest cost” to the consumer seems to have been lost in translation.

Despite this, there remains overwhelming support for green initiatives amongst UK small and medium-sized enterprises (“SMEs”).  When polled, in a recent survey commissioned by Cleanearth Energy, an overall majority (88%) of business owners or directors agreed that businesses ought to be environmentally responsible. However, just 33% of businesses believed that the current renewable energy policies supported a commitment to combatting climate change, and because of this over half (51%) had not been able to take action to adopt renewable energy projects.  A picture therefore begins to emerge of a market that has a desire, or at the very least a sense of obligation, to invest in renewable technology, but in many cases is unable to do so.  The survey indicates that there is clear evidence of the immense support for renewable technology.

Looking to the future, advances continue to be made in battery and storage technology, and the sector could see an upturn when the cost of this technology makes it widely accessible. Renewable generation technologies such as on-shore wind and solar must be combined with storage solutions to develop products that meet a fluctuating demand and eliminate the downside of intermittent generation. Matching demand with supply is the Holy Grail.

Support for climate change has never been greater but more must be done to support smaller businesses, individuals and communities investing in renewable energy projects. The green agenda now seems to be driven by private enterprise more than Government and the sector must come together to take full advantage of the opportunities which will emerge to ensure that renewable energy remains as accessible as possible for continued investment throughout the country. In doing so, renewable energy should continue to be an important part of the energy mix despite the current political instability and the uncertainties surrounding Brexit