New analysis of the power market undertaken by top global insurance company Marsh shows that diffidence by the investment community towards funding the sector is set to continue.
At a press briefing in the company’s London Headquarters on Tuesday, Mark Pollard, Leader of Marsh’s (NYSE: MMC) European Power Practice said that ‘the period of comfortable regulation’ was unlikely to return at least in the short term and subsequent lack of confidence by investors would persist.
Pollard said the capital for investment was plentiful, the institutions are longing to put that capital in, but the continuing holding pattern and damage limitation being exercised by regulators militated against it.
Mr Pollard fielded questions at the launch of Marsh’s Risk Management Research, The State of the Power Industry: The Lost Era of Regulatory Certainty, which highlights how regulatory uncertainty is having a negative impact on the need to balance continuity of supply, stable pricing, and environmentally acceptable resources.
“The risk is felt heavily by equipment operators and financiers. Investors expect performance for a minimum period of 20 years and uncertainty from regulators can mess up investors return – so investors are diffident.”
“The consequence of that diffidence is that infrastructure is slowing down in the sector-investors don’t trust policy makers or promises committed to beforehand.”
Marsh’s power chief cited the Czech Republic and Spanish governments’ behaviour as examples of the type of regulatory issues that weren’t helping investment potential. The Spanish regulator was cited for backtracking on policy five times in two years, and both governments had pursued retrospective regulation in order to reign in subsidies associated with renewables.
“A regulatory push to replace fossil fuels with low carbon generation has destabilised the security and cost elements (of the energy triangle)” he said. “The world had gotten complacent in its ability to manage supply and price.”
Referring to recent regulatory manoeuvres as ‘sticking plaster solutions rather than long term solutions’ he said that capacity market mechanisms being deployed in some jurisdictions in order to maintain coal and gas plants for power to cope with renewables’ intermittency also did nothing to encourage investment in the sector.
“It is a tremendous inefficiency, also with plant owners not being paid. The investor won’t invest if not getting paid,” he added. “There is the prospect of brown outs or God forbid black outs due to this systemic problem in the power industry.”
“It’s in a mess from a regulatory context. There is no lack of capital but a long term solution is needed. Investors would love to invest but present circumstances mean they are diffident and it’s putting supply in danger.”
72 per cent of the power industry respondents polled in the survey were concerned about the threat of cyber security, something which isn’t at all surprising given the vulnerability of distribution networks.
“In the modern world all telecommunications connected with the power sector are on the Internet, introducing huge cyber vulnerability not catered for in original closed telecoms infrastructure.
The German magazine Der Spiegel, recently displayed a front cover of a gold-plated electricity socket, highlighting the growing belief that electricity is becoming a luxury and he referred to that illustration to show how Germany’s Energiewende had in some ways backfired.
The push for more renewables on to the German grid had created an imbalance in cost and security to the extent that CO2 production has increased, rather than decreased since 2009, due to technological inefficiency and the German government may well have to postpone the closure dates for nuclear reactors, in order to avoid public backlash.
Pollard concluded by saying that innovations could change the whole paradigm, particularly in the area of electricity storage which isn’t yet at an industrial scale.
“You may have seen the extraordinary recent news of a container based fusion reactor announced by Lockheed Martin. It may be that this survey could be superseded by such technological breakthroughs.”
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