Two separate and coincidentally-timed interventions this morning show that energy companies are divided over plans to decarbonise the UK’s power sector by 2030. Centrica and RWE Npower confirmed their opposition to a carbon intensity target set at 50 grammes per megawatt-hour, whilst EDF Energy and the other companies that make up the Prince of Wales’s Corporate Leaders Group came out in favour.
It’s not difficult to imagine why one energy company might support decarbonisation and another might oppose it. Each utility has a different infrastructure portfolio and each has a different programme of investment planned; it's easy to assume that companies with lots of coal and gas on their books are lining up against those with a predominantly low-carbon portfolio. But is it really that simple?
A report by Bloomberg's new energy finance looked at the data on this - up until 2011. Their findings suggest a clear correlation between a utility's portfolio and its stance on decarbonisatiom.
EDF Energy is planning to build four new nuclear reactors, two at Hinkley Point in Somerset and two at Sizewell in Suffolk. Each of these European Pressurised Reactors is forecast to cost £7 billion, with a potential total of £28 billion if all four reactors went ahead.
This is an enormous capital commitment and more than the company could easily cover from its own balance sheet. However, a decarbonisation target that would preclude coal or gas within the lifetime of its new nuclear plant ought to provide considerable comfort to investors, many of whom have been scared off by the cost overruns that have dogged the construction of similar reactors in France and Finland.
Centrica has spent two thirds of its infrastructure investment over the past five years on new gas generation, and one third on on- and off-shore wind. However, it is more accurate to say that Centrica has not invested very much in new infrastructure; they have the lowest gross build and the lowest capex /operating income ratio (but the highest dividend payout ratio).
The firm has, however, been buying up other companies' oil and gas assets, including £1.1 billion of North Sea fields from Statoil, and entering into long-term supply deals to acquire gas from Norway and Qatar. Although Centrica has the option to buy a 20% stake in EDF Energy’s new nuclear programme, investors have concluded that the company is much more likely to build new CCGT plant – which may explain its opposition to a decarbonisation target.
RWE Npower has followed an ‘all-of-the-above’ investment strategy as it seeks to replace 6GW of coal plant that will close in 2015.
Half has been focused on new gas capacity, but RWE has also converted Tilbury power station to run on biomass and upgraded its Aberthaw coal plant to comply with post 2015 EU regulation (the Large Combustion Plant Directive).
RWE cancelled its joint plans with E.ON for new nuclear power, putting the Horizon consortium up for sale earlier this year. The utility has also invested considerably in on- and off-shore wind, but by 2015, after the LCPD comes into effect and its oldest coal plant close, 60% of its electricity will be generated by burning gas.
Like Centrica, it is easy to see how a decarbonisation target would hurt this increasingly gas-dependent company.
So it seems that correlations can be drawn between support or opposition to decarbonisation, and prior and planned investment.
EDF Energy supports decarbonisation; decarbonisation would help it build new nuclear plant. RWE Npower and Centrica oppose decarbonisation; decarbonisation would work against their investment in and dependence on gas-fired power plant.
This shouldn’t come as a surprise; only a very foolhardy CEO would adopt or reject a policy without considering how it affected their balance sheet. It makes perfect sense for a company committed to gas to oppose a policy that would force it to stop investing in gas; it also makes sense for a company committed to renewables or nuclear to back plans that would support low-carbon generation.
Nonetheless, given the widespread support for decarbonisation across civil society, trade associations, businesses, political parties and now some energy companies, utilities which take a stand against clean electricity are at risk of putting their short term business models ahead of their long term reputations.
