First published in the Quoted Cleantech Newsletter May 2010. Copyright Cleantech Investor Ltd. 2010

by Nigel Hawkins

As you read this, the UK electorate will be deciding, or will already have decided, who should govern Britain. Whilst commentators disagree on many aspects of this General Election, there has been a general view that the outcome is highly important – both for the UK generally and for the energy sector in particular.

With public sector net borrowing at around £163 billion – close to a quarter of total pre-debt public expenditure – it is self-evident that substantial cutbacks are virtually inevitable.

More specifically, the energy sector has been eagerly awaiting the outcome of the General Election.

For the renewables sector, major changes by the incoming government, whatever its political hue, are not widely expected. All three main parties broadly support the expansion of renewables generation – and are prepared to pay taxpayers’ subsidies to bring it about. There are, though, some differences over feed-in tariffs.

The real dividing point is on nuclear, which – though not technically a renewables generator – is undoubtedly a low carbon emitter. The outcome of the General Election will be desperately important for the prospects for UK new nuclear-build, which EdF – amongst others – has backed vigorously. The latter’s Christmas 2017 timetable does, though, look decidedly optimistic.

Two more than possible political scenarios would be major setbacks for new nuclear-build.

First, if the Conservative Party were obliged to rely on support from the Liberal Democrats, perhaps via a coalition, it may need to concede that no new nuclear-build could proceed. After all, the Liberal Democrats oppose new nuclear-build – the party has real concerns about the costs involved, irrespective of environmental issues.  

The second scenario could be equally damaging. A small Conservative Party majority would likely lead to a second General Election, say by mid-2011. The precedent for this eventuality would be the spring 1974 General Election, which the Labour Party won, with just four more seats than the Conservative Party. But, within nine months, the Labour Government sought a second General Election, from which it secured a decent majority.

If this pattern were to be repeated over the coming year, it would delay investment in key areas, including the energy sector. Many potential investors would postpone their projects until it became clearer who was in government – especially on the nuclear front.  

At the political level, a second General Election might well be held shortly after the introduction of savage public expenditure cuts – hardly likely to appeal to a sceptical electorate – and with a new (presumably) Labour leader in opposition. It would certainly be a difficult General Election for the then incumbent Government to win.

Aside from the political issues, the renewables sector itself remains very dependent upon the level of public subsidies.

In recent days, there has been real concern about the likelihood that Spain may slash its renewables subsidies, especially for solar generation. Currently, it is unclear how any changes might affect renewables generation in Spain. But solar operators – and, by implication, companies supplying solar equipment – are very dependent on the payment of taxpayers’ subsidies.

Certainly, if some of the rumours in Spain about both subsidy cuts, and perhaps even retrospective application, are anywhere near accurate, the renewables sector will find life increasingly difficult. Any attempts by cash-strapped Mediterranean governments to cut their renewables subsidies would have a major impact both on existing plants and on future pipelines: clearly, valuations would be impaired.

Of course, for those actually operating onshore wind plants, lower subsidies should be less of a problem, given that their generating costs are reasonably competitive.

Interesting times indeed.

Nigel Hawkins is a Director of Nigel Hawkins Associates, which specialises in the provision of investment and policy research.