AIC calls on government to review inflation indexation in renewables scheme amid £346m losses
The Association of Investment Companies (AIC) has written to the UK government calling for a review of the proposed shift in inflation indexation within the Renewables Obligation (RO) scheme, as it could materially reduce cashflows to climate and energy investment, including projects held within listed renewable trusts.
In late November, the government set out proposals to align inflation indexation for the RO scheme, a clean energy subsidy, with the Retail Price Index (RPI) instead of the Consumer Price Index (CPI). This, the AIC has argued, would reduce trust in the UK government’s long-held reputation for consistency, have broad implications for energy infrastructure investments – where around £12bn is held in renewable trust assets – and only reduce household bills by £3 a year.
A letter dated 2 December sent to Ed Miliband, secretary of state for energy security and net zero, and to Bill Esterton MP, chair of the Energy Security and Net Zero Committee, said: “RO projects were financed on the clear understanding that support would be indexed to RPI for the full duration of the scheme. Investors relied on these terms when committing capital to infrastructure central to the UK’s decarbonisation pathway. Changing the indexation mechanism mid-way through the life of these assets breaks a long-standing policy commitment and signals that established frameworks may be revised even after capital has been deployed.
“Such retrospective action inevitably damages investor confidence and heightens perceptions of political and regulatory risk.”
It highlighted that in the days following the proposal announcement, several listed renewable-energy investment companies collectively lost £346m, equivalent to around 5% of their market capitalisation
“This change risks deterring further private investment at a time when the UK needs more, not less, capital to meet its 2030 and 2035 climate and energy objectives,” the letter continued. “Confidence in policy stability is
essential if the UK is to attract the private investment required for a secure, low-carbon energy system.”
The AIC recommended the governance instead take a similar approach to the Review of Electricity Market Arrangements (REMA) Programme, which identified a stable and predictable policy framework as essential to secure investment, and urged the committee to to engage with industry stakeholders before pushing ahead with proposals. It also called for the government to carry out full impact analysis including the implications for renewable-generative asset valuations, financing conditions and the long-term cost of capital for UK energy projects.
Richard Stone, chief executive of the 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 £12bn 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.”
See also: The future of investment trust ESG disclosures
Trust boards back AIC call
The chairs of Foresight Solar, Foresight Environmental Infrastructure, Bluefield Solar Income, Octopus Renewables Infrastructure, NextEnergy Solar and GCP Infrastructure Investments trusts all backed the AIC’s letter and have called for the government not to switch to RPI indexation on the RO scheme.
Andrew Didham, chair of GCP Infrastructure Investments, said: “We recommend 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.”
Tony Roper, chair of Foresight Solar, added: “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 consultation closed on 2 December. Subject to the consultation outcome and ensuing legislative process, the government intends to make changes to inflation indexation before the start of the next scheme compliance year on 1 April 2026.