Jeremy's Blog 7th July 2023: Utilities Infrastructure - The Scale of Change
This article by Jeremy Moody first appeared in the CAAV e-Briefing of 6th July 2023
The re-electrification of Britain is a key part of the net zero agenda. The broad, high level policy aims are to double the amount of electricity we use by 2050 and so to double the amount generated, all as renewable energy, powering most heat and transport. That means doubling the amount to be transmitted and distributed across the country between generation and use, across clients’ land to give the capacity needed with all the substations and other infrastructure associated with that – and the professional work.
The scale of this is vast, envisaging a cost of some £350bn between now and 2050. National Grid is being divided between its operations and its regulatory roles. With much policy work going on, we expect announcements soon to tackle the problem of getting the connections that now frustrate many solar and wind schemes. England’s National Planning Statements may be revised to ease and speed the planning processes, including NSIPs with DCOs. Last week’s Sunday Telegraph described this as imposing pylons on people – who might though also expect the electricity these would bring.
Even if all this is eased, as intended by both Government and Opposition, massive practical problems remain if all this is to be built on time – or in full. Alongside the issues of contractor capacity and cost, the reporting of Thames Water’s finances suggests we should now add funding for distribution and transmission to homes and businesses.
Income-earning power generation, principally the large solar and wind farms needed to provide the supply at the scale required, may be the easier part for private sector funding. Thames Water’s story points to challenge of funding the regulated utility companies that do the transmission and distribution, especially where debt is large part of their funding. On what terms will financial markets provide either capital investment or further lending? That may become worse if these sectors come to be seen as tainted with greater risk.
The water companies also need funding for the spending being required of them. Aside from the spending on reservoirs and pipes to provide the south east with water, the Levelling Up Bill would require almost all sewage plants to have minimal nutrient discharges by 2030 while answering the Environment Act’s challenge on storm discharges is an enormous cost.
The problem does not lie in privatisation (we forget how much improvement there has been) but partly in the pressure to hold consumer charges below what has been needed for a sustainable system with new investment. Those chickens of “living off the future” are coming home to roost. Then, those companies owned by “private equity” tended to carry more debt than average, raising returns to capital. However, higher interest rates make the model more risky, reducing its attractiveness to funders, while a Special Administration Regime (similar to that used for Bulb) has been a possibility for Thames Water bringing risk and moral hazard issues for all.
This all adds cost to the already enormous intended commitments, adding to the prospective strains and pressures in delivering this infrastructure with consequences that could reach to negotiations in the field. We have to watch that affected owners and businesses are properly treated both for fairness and the easier delivery of work.