2023 Predictions: Energy and Infrastructure sector outlook 

January, 2023 - Shoosmiths LLP

“With the energy crisis likely to continue throughout 2023 and pressures on governments, businesses and individuals to take action to tackle climate change, I expect that, whilst government funding may be limited, there will be no shortage of capital for investment in clean energy projects. As for infrastructure, impacted inevitably by the constraints of government spending, the focus will continue to shift towards next generation infrastructure with a greater emphasis on boosting productivity and using technology and data to drive efficiencies.”

This is just one of the insights from James Wood-Robertson, head of energy and infrastructure at Shoosmiths, who looks back at the industry trends of 2022, and what new developments to expect over the coming year.

2022 in retrospect

Climate change continued to move up the political and economic agenda – with extreme weather events and activism in the news almost daily. At COP 27, world leaders made a breakthrough agreement to provide ‘loss and damage’ funding for vulnerable countries hit hard by climate-related disasters.

The need to strengthen systematic observations and to achieve universal coverage of early warning systems was emphasised– two of the World Meteorological Organisation’s (WMO) top priorities.

Elsewhere, the continued war in Ukraine highlighted world economies’ dependency on fossil fuels and led to huge price increases in oil and gas. Russia’s position in global energy markets and the shape of those markets were fundamentally altered.

Then 2022 saw the E.U. approach major gas suppliers in countries such as Norway, Algeria, and the United States and producers of liquefied natural gas in Africa and the Middle East to plug the gaps in supply.

As a result, governments across Western Europe were forced to act to provide support for consumers – setting a price cap in the UK (but only until April when it will be revisited) and similar protection across the EU countries.

Meanwhile, businesses’ need for energy security and price certainty along with meeting ESG commitments have meant the demand for energy from renewable sources has never been higher.  

We have seen this particularly in the corporate power purchase agreement (CPPA) market, where not only have prices (and sleeving/balancing fees) increased very significantly, but also generators, who previously competed in customer led CPPA tenders, are not running their own tender exercises inviting corporates to bid for their renewable electricity volumes.  

There was also a general clamber to close out deals and lock in committed prices. Windfall tax of 45% was to be levied on revenues over £75/MWh made by grid-connected renewable energy generators (by corporate group) through the Electricity Generator Levy (EGL) – with a lack of certainty until the Autumn statement as to how the renewable energy sector would be affected. 

We now have the details - with the draft legislation and revised guidance published just before Christmas addressing some of the initial questions and concerns, including how corporate groups’ will be defined, and how private wire projects with grid connection will be treated.

The Autumn statement also brought news of an Energy Efficiency Taskforce (EET) and now energy businesses, individuals and companies are keen to understand more about how the EET will operate and how it will ensure, unlike previous energy efficiency initiatives, to prove a success.

2023 and beyond

Gas and electricity prices are likely to remain high.  Macro-economic factors, including the war in Ukraine, are likely to be unchanged and suppliers will have bought in recent months at the high prices to ensure security of supply for the next year. 

These prices will ultimately flow through to consumers, so pressure will remain on the government to provide some form of protection to them, as well as businesses. The government has indicated, however, that it will be looking to provide more sophisticated support for “those in the greatest need”, rather than blanket support for all households.

Generators will need to consider the impact of the Electricity Generator Levy on their business models for existing portfolios and also for new projects in planning. This ‘temporary’ tax will run through to 31 March 2028, so the impact will be long-lasting. As generators now have the detail of the levy in the draft legislation and revised guidance, they can properly consider the impact of the levy on their existing portfolios and planned new developments.

In any event, the need to develop clean energy and energy storage projects is only increasing with greater diversity of technologies and solutions needed and there is still a huge amount of capital available to fund these projects. 

Appetite only dampened in recent months due to rapidly rising interest rates and uncertainty for the future. If inflation settles down and long-term interest rates also reduce, the greater macro-economic certainty will definitely boost investment into Q3 and Q4.

There are also plenty of projects in the pipeline – traditional (wind and solar), less established (battery storage) and innovative (hydrogen and CCS) – and a wave of capital ready to fund its deployment.  

We are looking forward to seeing our clients complete the deals for the delivery of a number of these projects – wind, solar, battery storage and hydrogen – throughout 2023.

The House of Commons on December 19th completed its hydrogen inquiry determining that "Hydrogen is not a panacea for reaching Net Zero" and it is "unwise to assume hydrogen can make a large contribution to reducing UK greenhouse gas emissions in the short and medium term”. The Committee has argued that when looking ahead, hydrogen will likely have a “specific but limited” role in decarbonising sectors where perhaps electrification is not possible. This is highlighted within the transport sector, for example, where areas of the rail network which are hard to electrify, bus networks which have a local pattern of operations susceptible to refuelling at depots, and some parts of shipping and aviation.

Summary

With REMA (Review of Electricity Markets) appearing over the horizon to effect whole system changes to the electricity network and use of system charging, the next 12 months and beyond will be heavy with debate about the best way of implementing systemic change and an overhaul of the current system.  It’s a very complex issue to resolve.

In a period of great economic stress and uncertainty, the wider imperative to deliver projects necessary to halt and reverse the impact of climate change has never been greater.  Corporates focussed on delivering on their ESG commitments and ensuring energy security and price certainty could be a driving force.

 



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