The Association of Investment Companies (AIC) has strongly criticised the government’s proposals to align inflation indexation for the Renewables Obligation (RO) scheme, a type of clean energy subsidy, with RPI instead of CPI.
The AIC’s response to the government consultation, ‘Changes to inflation indexation in the Renewables Obligation scheme’, argues that the effect of the move to CPI will be to reduce trust in the UK government’s long-held reputation for consistency whilst household bills would fall by as little as £3 a year. (See below for a fuller explanation of the Renewables Obligation scheme.)
Richard Stone, Chief Executive of the Association of Investment Companies (AIC), said: “Maintaining investor confidence is central to delivering this government’s ambitions for clean energy. Switching from RPI to CPI for the RO scheme is retrospectively altering the calculation that investors used, in good faith, to model their returns and commit their capital. The impact of this U-turn midway through an agreement would erode investor confidence in the British government as a business partner, and these proposals must be withdrawn.
“The RO scheme today underpins projects that make up 30% of the UK’s entire electricity supply. It has encouraged billions of pounds of investment through investment companies into green energy, with investment companies currently holding £12 billion in UK renewable energy assets. This proposal threatens the viability of clean energy projects and the entire UK transition to net zero for a saving of only £3 a year on household bills. The long-term consequence of this proposal will be higher costs for consumers as investors lose faith and the cost of capital increases.”
Tony Roper, Chair of Foresight Solar, said: “The board of Foresight Solar urges the government to reconsider its proposals. Making retrospective changes to support schemes inextricably linked to the investment case for solar and wind will be detrimental to current sentiment, to future capital deployment into renewables and to the UK overall. The Spanish government implemented similar revisions in the 2010s and they severely eroded investor confidence, triggered billions in legal claims, and caused a sharp decline in renewable infrastructure investment.
“We remind the Department for Energy Security and Net Zero that many electricity consumers are also pensioners who hold investments like Foresight Solar as part of their retirement portfolios. This consultation’s proposals have already caused hundreds of millions of pounds in losses for them and the proposed changes, as they stand, will lead to more damage for the very people the government is trying to help.”
Ed Warner, Chair of Foresight Environmental Infrastructure, said: “While we welcome any effort to modernise policy frameworks, the proposed changes to RO and Feed-in Tariff (FiT) schemes risk undermining the stability that has enabled billions of pounds of investment in UK renewables. Sudden shifts – such as moving from RPI to CPI – create enormous uncertainty at a time when investor confidence is crucial. We urge policymakers to work collaboratively with industry to ensure reforms strengthen, rather than weaken, the UK’s leadership in clean energy.”
Michael Gibbons, Chair of Bluefield Solar Income Fund (BSIF), said: “Investor confidence depends on stability and predictability. Retrospective changes to the Renewables Obligation scheme risk undermining that foundation, and the UK’s reputation as a reliable place to invest. Rewriting obligations after agreements have been made risks eroding confidence, is likely to drive up the cost of capital, and so ultimately could mean households face higher energy bills. For these reasons, the government should change course.”
Phil Austin, Chair of Octopus Renewables Infrastructure Trust (ORIT), said: “We fully support the government’s ambition to keep energy bills affordable for households. The most effective way to achieve this is by accelerating the production of clean energy to reduce dependence on expensive fossil fuels. Stable and predictable policy is essential to attract the investment needed to build the UK’s next generation of renewable energy infrastructure.
“Sudden or retrospective changes to the government’s existing clear and transparent RPI reform timetable could hit investor confidence at a critical time for UK clean energy investment – and risks delaying the transition to net zero while driving up energy costs. ORIT stands ready to invest in the next wave of UK clean power, and with a predictable policy framework we believe we are in a stronger position to deliver affordable energy for everyone.”
Paul le Page, Chair of NextEnergy Solar Fund, said: “The UK government has made significant steps in advancing their commitment to Clean Power 2030 by extending the future tenor of their Contracts for Difference scheme to improve revenue certainty. The proposed modification of the terms of legacy Renewables Obligation Certificates and Feed-in Tariffs risks undoing much of this good work by adding an uncertainty premium to any future contracts in which the UK government is a counterparty. It could have wider adverse cost implications beyond the renewables sector if the UK government is perceived to be an untrustworthy counterparty by financial market participants.”
Andrew Didham, Chair of GCP Infrastructure Investments, said: “We recommend that the government does not pursue the proposed changes to RO and FiT indexation. Doing so would be a retrospective change to legislation resulting in a significant adverse impact on investor confidence in UK public-sector backed infrastructure and renewables projects. The resulting costs of the proposals, including an increased cost of financing for the UK’s ambitious infrastructure investment programme, and the reduction in the value of investments ultimately held by UK investors, far outweigh any benefits.”
Impact of proposals on investment companies
Several investment companies in the Renewable Energy Infrastructure sector are impacted by changes to the RO subsidies. In the week after the consultation was announced, these investment companies saw their share prices fall significantly, reflecting the market’s view of the impact on their value. See the chart below.
Share price impact on Renewable Energy Infrastructure investment companies
Source: theaic.co.uk / Morningstar. Change in share price of investment companies in the Renewable Energy Infrastructure sector in the week following the publication of the government’s proposals to move contracts from RPI to CPI.
Renewables Obligation scheme explained
Currently operators of renewable energy infrastructure such as wind farms or solar projects receive around half of their income from government subsidies. The idea behind the subsidies scheme was to incentivise private capital to build more clean energy projects, aid the switch away from fossil fuels and meet the government’s net zero targets.
However, the proposed retrospective change to the existing agreements would not only reduce income for renewable energy operators and their investors, but it would also undermine confidence in the government as a reliable investment partner. This could threaten future renewable energy projects because investors are less likely to invest alongside a government that has a record of retrospectively changing the terms of its contracts at short notice. Those who do invest under the new terms, or in other government backed projects, would charge more for doing so due to the reduced returns and perceived risk of doing business with a government that is viewed as unreliable.
