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In previous blogs we have referred to the future investment required in the UK electricity industry.  Towards the end of September 2013 a political debate emerged relating to the increasing price of electricity in the UK. There is no doubt that prices have significantly increased since 2007 but the question is why? and if the UK decides to freeze electricity prices how would the required investment we have discussed before be funded?

 

It is clear that private companies working in a competitive market, such as the UK electricity market, will only invest if they are predicted to make a profit in other words when the net present value is positive.  With an increasing amount of green policies impacting on this industry investment is required sooner than expected and the type of investment is often guided by the new policies emerging and this is adding to the increasing cost of electricity generation.  For example, greener technology is required and the old dirty coal power stations are no longer in favour. However, as soon as politics become involved in sensible business investment decisions it gets more complicated.  The leader of the Labour party in the UK announced if they were elected during the next general elections they would freeze electricity prices to stop ‘energy poverty’ increasing.  This in principal sounds a good idea.

 

However, forgetting the politics what we need to consider is how the investments could go ahead to prevent black outs (black outs happened when there is not enough assets generating electricity – this is where most of the investment is needed in the UK). The balance sheets of the big six generators cannot fund the required investment, so if price freezes are imposed how can the big six produce enough profit to make the investment the UK needs?  The answer of course would be the tax payers in some form of incentive to invest.  Of course this all questions the ideology of a free and competitive market!