U.K.’s $582 Billion Energy Switch Faces Crisis, Liberum Says

The U.K.’s 376 billion-pound ($582 billion) program to switch from fossil fuel to renewable and nuclear power is headed for crisis because of looming energy shortages and spiraling costs, Liberum Capital Ltd. said.

The U.K. government has “grossly underestimated” the engineering, financial and economic challenges posed by Britain’s goal to decarbonize its electricity, Peter Atherton, utilities analyst at Liberum, said today in a note. Investors will face the bulk of the financial pain as the government seeks to shield itself and voting consumers from a crisis, he said.

Britain is overhauling its energy market to replace aging plants with cleaner supplies as a fifth of U.K. power capacity retires in the next decade. The reforms, including atomic power incentives as well as payments for peaker gas plants, suffered setbacks after SSE Plc delayed investments and as government talks with Electricite de France SA over the price it will earn to build the first new nuclear plants in two decades falter.

“Moving from a largely fossil-fuel based power system to one dominated by renewables and nuclear in just a decade and a half, whilst keeping the lights on and consumer bills affordable, may simply be impossible,” Atherton said. U.K. utilities and investors should limit exposure as political risk rises. Biomass developer Drax Group Plc, SSE and Centrica Plc will be the most exposed, he said.

Perfect Storm

Triggers including wholesale price spikes as the market anticipates shortages in 2014 to 2017, longer-term scarcity and rising consumer bills could spur a crisis, or the factors could combine creating a ‘perfect storm’, the analyst said. Regulator Ofgem has said Britain faces a looming supply squeeze.

The reform plans will require 161 billion pounds by 2020 pushing power bills up 30 percent, according to Liberum. The sum, more than the 110 billion pounds the government estimates is needed, may rise to as much as 376 billion pounds by 2030 prompting a 100 percent bill rise in real terms, Liberum said.

“Even with the large increase in public support provided by the Energy Bill it is extremely hard to envisage that this finance will be forthcoming given that the large European utility companies are actually reducing capex,” he said.

Liberum published its research as the Department of Energy and Climate Change confirmed Jonathan Brearley, the lead civil servant on its reform bill set to become law by the year-end, resigned with effect from July to take a career break after three years at DECC. Electricity market reform will not be disrupted by the change and recruitment is underway for a replacement, a DECC spokesman said today by phone.

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