LONDON (Alliance News) - The World Energy Council has downgraded its rating on the UK's energy and climate change policies and retained it on its watch list over concerns about its ability to source new energy supplies and a lack of future investment in renewable energy.
The World Energy Council, an alliance of over 90 countries that provides information and resources on all aspects of energy, downgraded the UK's energy rating to AAB from AAA. That rating is based on a combination of energy security, energy equity, and environmental sustainability.
Importantly, the council retained the UK on its negative watch list because it believes the UK's energy security will decline in the coming years, meaning its rating and performance is expected to deteriorate further over the coming years unless action is taken.
"The United Kingdom's score is amended to 'AAB', as its energy equity dimension suffers compared to other leading countries," said the council in its latest report.
Energy equity refers to the amount of investment and investment sentiment there is towards the energy industry, with the council being primarily concerned for the future investment in renewable energy in the UK due to government policy change.
The council said the UK faces "significant challenges" in securing new energy supply, with oil and gas production continuing to steadily decline and the closure of nuclear and coal power plants.
The UK North Sea is the country's prime source of energy production, with around 69% of electricity being generated from fossil fuels. However, as one of the more mature and aged areas in the world for oil and gas production, it has suffered from declining rates of production.
The collapse in oil prices since the middle of 2014 has placed further pressure on the North Sea, which has since seen companies cut back on or defer investment or even sell its assets because the North Sea simply is not as economical as it used to be, especially with oil prices remaining below USD50 a barrel.
Nuclear power accounts for around 20% of the UK's electricity generation, but all but one station is set to be closed by the middle of the next decade, with new plants that are set to be built by China not set to be operational for years to come.
"The nuclear fleet is being run down, and many coal plants will be forced to close by European legislation. Constraints in domestic supply have been further aggravated by a number of unscheduled incidents in 2014, which have caused the closure of three power supply plants and four nuclear reactors," said the council.
"Furthermore, ageing infrastructure and the tightening of reserve capacity margins, called for extraordinary measures by the national grid operator, including tenders, to ensure supply during the winter 2014/2015," said the council.
In October 2015, National Grid PLC, which manages the UK's electricity network, had to enlist power stations to provide extra capacity for this winter after the chances of blackouts increased. However, that move also drew criticism as it would push up household prices, already the subject of intense scrutiny in the UK.
To put that into perspective, the capacity margin, which measures how much extra energy there is compared to the amount of energy actually needed or used, fell to 1.2% in 2015 prior to the National Grid taking action - its lowest level since 2005 to 2006.
"The UK's energy security performance does not yet reflect these constraints and is expected to decrease in future rankings," the council said.
The other major concern for the council is the flurry of energy policy changes made by the UK government since the Conservatives won an outright majority in the General Election back in May. The government has been slashing renewable energy subsidies, hampering the solar and wind industries, in favour of trying to push for shale gas exploration, or fracking, and trying to boost production from the North Sea.
Since March, the UK government has cut or amended the majority of renewable energy subsidies, including the Renewables Obligation, Contracts-For-Difference, Feed-In-Tariffs, the Levy Control Framework and the Climate Change Levy, all of which massively benefit renewable energy companies and their projects.
The drastic changes came after the government said back in July that had already overspent its budget to support renewable energy projects over the next five years by GBP1.50 billion.
The council said the attack on renewable energy policies, alongside the near term uncertainty that comes with it, "may hinder investments" in the sectors, which in turn would have an impact on the UK's goal to increase renewable energy generation.
The effects of the policy changes have already began to creep through, with London-listed companies such as Drax Group PLC and Infinis Energy PLC warning subsidy cuts would cost them both millions in earnings over the next two to three years. Infinis has gone a step further and is in the process of going private before the regulatory changes really start to take effect.
Other renewable energy companies are racing to complete projects so they can qualify under grace periods for the subsidies before they are removed completely, whilst some have voiced concerns about the ability to secure financing from equity markets or banks due to the policy changes.
The UK has a target to have 15% of all of its electricity generated from renewable energy by 2020. Currently, only around 10% to 12% comes from renewables and those recent policy changes could make it more difficult for the country to achieve its goals.
"The greatest challenges for policymakers will be executing the reforms, monitoring their impact and if necessary adjusting the new policies to ensure they are effective while staying within the overall prescribed cost framework," said the council. "Consistency of policy is also crucial to secure and maintain investments while reforms are being implemented."
"Overall, the United Kingdom maintains a stable position in the Index throughout the years. The UK remains a ?Pack leader? and continues to balance the energy trilemma very well, with good performance on all three energy dimensions," the council said.
In the council's ranking of countries' energy policies, the UK remains in fourth position despite the downgrade, behind Norway, Sweden and first-placed Switzerland.
The council introduced negative and positive watch lists back in 2014 to monitor countries that showed trends that may lead to significant changes over the coming years. The UK was already placed on the negative watch list last year.
The negative watch list is currently comprised of the UK, the US, Germany, Italy, Japan and South Africa whilst the positive watch list is comprised of the United Arab Emirates, Mexico, the Philippines and Serbia.
By Joshua Warner; joshuawarner@alliancenews.com; @JoshAlliance
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