Summary and Implications

In July, Ernst and Young issued a follow up report to its February 2009 report, Securing the UK's energy future – meeting the financial challenge. The earlier report had stated that £235 billion of new investment was required by 2025 in order for the UK to meet its energy goals. Due to the current economic climate, in particular a fall in energy demand, this figure fell to £199 billion in the follow up report. This created an investment opportunity which if seized upon can set a baseline for future reductions and can, as stated by Tony Ward, a Partner in Ernst & Young's utilities team, "embed change that could not be anticipated 12 months ago".

Crucially this report also set out key risks which if not addressed will inhibit investment in the sector and cast into doubt whether the UK will meet its energy objectives.

Re-evaluating the investment challenge

Centrica commissioned Ernst & Young to re-evaluate the level of investment required for the UK to meet energy targets. The economic recession has had an effect on the demand for both gas and electricity with estimates suggesting that annual demand has fallen by approximately 5 percent and 6 percent between 2008 and 2009.

Estimates for particular technologies have changed and overall there has been a slight easing in financing costs and favourable shifts in exchange rates. Through a series of amendments in the April 2009 Budget, the Government has incentivised investment. It has added further incentives in the Renewable Energy Strategy and Low Carbon Transition Plan.

In addition to the above, with an election due next year, public debate has increased, an example being the Confederation of British Industry publishing a report on the UK's future energy needs.

Level of investment required to meet energy goals

In order to meet energy goals, Ernst & Young suggest that a major ramping up of investment will be required with approximately £90 billion needing to be invested by the end of 2015. This amount consists of over £40 billion of renewable generation investment, almost £8 billion on gas storage, a further £8 billion to commence construction of four new nuclear power stations, and £7 billion for new gas fired power stations. The remaining £16 billion will be required for electricity and gas transmission, distribution and supply infrastructure. 14

In addition to meeting energy goals, the investment could also support up to 140,000 jobs and benefit the UK economy by up to £10.5 billion.

Risks on investment, solutions, and consequences of not mitigating

Ernst & Young identified 4 main areas of risk that could jeopardise the UK meeting the energy targets.

The areas of risk include supply chain weaknesses; planning hold ups; viability of project economics and finally policy and regulatory risk. In addition, specific consequences were identified as a result of failure to mitigate such risks. Firstly, investment will decrease. The total investment could be as low as £53 billion by 2015 instead of the required £90 billion and, £165 billion by 2025 instead of the required £199 billion. In addition to this, the 2020 UK climate change and renewable energy targets would be missed and up to 40,000 fewer jobs would be supported leading to £3 billion less economic benefit generated.

The required investments will be successfully unlocked and the risks will be mitigated however, if an environment is provided to enable investor confidence, energy efficiency is accelerated and the UK is enabled to invest in the energy supply chain and capture the associated benefits.

Conclusion

There is a great opportunity for energy investment, however it is an opportunity that would be damaging if missed. In order to meet targets, this required investment must start now. The decisions that are taken now by the Government and the industry will have a direct effect on whether or not the UK is in line by 2015 to achieve the targets by 2020. The report states that to act now is not only the responsible step towards achieving the UK climate change targets but it is essential.