Summary
Concerns have been raised as to UK's ability to provide enough energy in the coming decades. That new "green" initiatives, such as wind generated electricity, replacing conventional coal and gas driven plants will neither be able meet future demand nor provide the adequate security of delivery. Regardless of whether these concerns are well founded or not, the fact that there is uncertainty is likely to affect todays decisions about future investment in energy intensive industries.
Analysis
Energy intensive industries are a diverse universe of production and services ranging from e.g. the production of vegetables in greenhouses to the smelting of metals. Different activities may require different types of energy, be it heat or electricity, and different levels of security of delivery. A green house may tolerate a few hours of no energy whereas an aluminium smelter can not.
A characteristic of energy intensive industry is quite often the capital intensive initial investment, long lead time to full operation and the need for additional natural resources, such as land and water. Uncertainty around any of these factors will deter investors from initiating new projects in the relevant areas.
Todays doubts about the future of energy production and security in the UK is likely to already impact decisions on where to locate future energy intensive industries, especially those producing easily transportable goods. The chances of energy prices rising markedly in the future, due to more expensive energy production methods, will also further this development.
It is likely that investors will first consider locations geographically close to UK, where they have access to stable cheap energy, adequate infrastructure and good transport, and then move further out as these locations are maxed out. Hence, the first companies to act and secure the best locations, will be at a competitive advantage.
Iceland is an interesting location in this respect, where there is ample energy (both heat and electricity), no shortage of natural resources, such as land and water, and easy transport to UK. Add to this the fact that the current exchange rate for the local currency has never been more favorable for foreign investment. It is however likely that the opportunity will fade as more energy intensive operations enter the country, as is already happening.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
