Hill+Knowlton Strategies

In a recent blog post, the Financial Times’ energy blogger Nick Butler, a former BP executive, states that uncertainty of the U.K.’s energy policy framework is here to stay. He interprets the failure of the U.K.’s Department for Energy and Climate Change and the Treasury to come to an agreement on the level of subsidies for wind energy as a symptom of a permanent public policy risk for energy investors. Energy policy change, Butler writes, can come from numerous sources: from a change of government and changing energy market fundamentals to technical leaps. (Note that the latter two are hardly public policy in a conventional sense.)

While Butler is absolutely right to point out that energy markets are fundamentally political, it depends on political culture and the actual policies in place whether the political nature of energy markets creates political risk.

Consider the success of Germany’s feed-in-tariff regime for renewables. Regardless of the question whether one is for or against this colossal subsidy scheme, it is quite obvious that it is very successful in unlocking serious investments in renewable energy, particularly PV.

This is, of course, partially due to the fact that investors think the current levels of feed-in-tariffs create a compelling business case. But equally important is the fact that they rate the risk that the German government might change its mind and retroactively cut feed-in-tariffs for existing assets (like the Spanish government has in the wake of the fiscal crisis) as very low. This trust, of course, is grounded (a) in the general credit-worthiness of the German sovereign and (b) in German political culture which rates “Rechtssicherheit” (legal certainty) very highly.

So it comes down to the question whether investors believe that energy policies create a stable investment environment, or not. With the right policies in place, I don’t see any reason why the U.K. shouldn’t be able to create this belief.