I awoke last Friday morning to find that the UK had decided to exit from the European Union (EU). I was a bit shocked to say the least and then I went to breakfast to meet an enraged Irishman who had just lost a small fortune because of the investments he had made in UK solar development. His immediate reaction was that he would not be able to build those assets given the collapse of the pound which makes the cost of solar modules and inverters prohibitively expensive and thus the projects nonviable. My next meeting was with a German utility who is also developing renewables assets as well as owning and operating them in the UK. These so called assets are now close to generating negative cash flows in euro terms (because of the fall in value of the pound) and if they do sell those assets they will make a loss on them. And Brexit also impacts me directly. My business Alexa Capital is a corporate finance business which facilitates capital flows in and around energy infrastructure as well as raising capital for growth companies and helping companies with mergers and acquisitions. All of this has now become more difficult. And to make matters worse the UK needs to replace a large part of its aging energy infrastructure over the next years if it wants to keep the lights on.
The issue now is that investment decision makers don’t like uncertainty especially when they are investing in assets that need to be in place for the next 20-40 years. To make matters worse much of the new power generation infrastructure that has been put in place in recent years in the UK has been financed by foreign capital from energy companies such as Electricity Ireland, Vattenfall and Statoil, and financial institutions such as the Bayern LB and MunichRe. There is now big questions marks about their willingness to continuing investing in UK pound assets.
We also do not know whether the UK will continue to implement the wide range of European directives (such as Renewable Energy, Large Combustion Plant and Energy Efficiency directives), which have pushed much of the investment in UK energy in recent years. In fact, we have no idea what the energy policies of a new UK government will be. To make matters worse, the continuing falls in the value of the pound will not only cause foreign capital to think twice about investing in UK energy but it will also push up oil, coal and gas prices which should in turn push up energy prices for the consumer.
This may in turn put pressure on governments to reverse a ten year move away from coal to cleaner sources of energy such as wind and solar. The biggest risk however must be to new nuclear and there must be serious questions around the ability to finance the Hinkley Point nuclear project which relies on inward investments from the Chinese and French. But even if that is sorted, let us not forget that the project is already delayed, that it won’t go online for another decade and if it does the UK consumer will be paying 3x the current UK wholesale power price for that electricity. To make things worse the likelihood of further inter-connectors being built into Europe has now decreased which means that there will be less competition amongst power generators in the UK. This implies that consumer bills will have to go even higher!
And what does this mean for investment in UK energy? We will see nothing happening in terms of new investments until a new government is formed and even then it may take a lot longer for that government to sort out where it wants to go with its energy policy, which will only make the likelihood of the lights going out greater. And even if they do stay on it with will be much more expensive for the UK consumer.