UK renewables subsidy cuts ‘good news' for investment

29 May 2014 15:56 Source:ICIS

Investors engaged in the UK’s renewable energy sector are unfazed by a recent hardening of the government’s attitude towards industry subsidies and insist the move sends a positive signal that the cost of renewable power generation is dropping.

Proposals to exclude solar projects above 5MW capacity from the UK’s large-scale subsidy scheme, the renewables obligation (RO), from April 2015 were advanced by the Department of Energy and Climate Change (DECC) earlier this month.

Schemes will instead by eligible under contracts for difference (CfDs), which remove a large portion of market risk from the subsidy structure and will eventually replace the RO, although the Solar Trade Association (STA) labelled CfDs “far less accessible” for generators.

The Conservative Party has also said it will not allocate public funds for the development of new onshore wind farms if it wins next year’s general election.

But investors involved in the sector do not seem perturbed by the recent shifts. “The key thing is that the cuts have not been applied retroactively, which is what investors are concerned about,” said Climate Change Capital advisory head Ian Temperton.

Temperton added it was a “good news story” if tariffs to support clean energy projects were being cut to reflect cheaper costs in generating renewable energy.

“From our advisory role, there’s a lot of appetite from other funds to invest in wind and solar assets in good, solid countries,” Temperton said.

The move by the government to withdraw subsidies has met with criticism from some industry bodies, with the STA describing the exclusion from the RO as a “crippling blow” to the future of the industry, while a major ratings agency, Fitch Ratings, anticipating a short-term slowdown in the sector’s growth ( see EDEM 20 May 2014 ).

Shinier gloss

But a report published last week by the Standard & Poor’s (S&P) ratings agency put a shinier gloss on the future of the UK renewables sector. The agency believes that the UK “will continue to provide stable and predictable support for renewable energy production” on grounds that the government has only reached 4% of its 15% target for green energy production by 2020.

Michael Wilkins, credit analyst who helped to compile the report, said the agency’s optimism was based on the government’s electricity market reform, which will provide more revenue certainty to renewable generators through the CfD scheme as well as tackling deficiencies in the workings of the power purchase agreement market.

“[CfDs are] a better system than others such as feed-in-tariffs, which are much more prone to political tampering. The contracts are legally binding and much less susceptible to political influence,” Wilkins said, adding that small-scale rather than larger renewable generators would be most affected by the subsidy reforms.

Private equity company Terra Firma is in the process of establishing a new fund of up to $2bn (€1.5bn) solely devoted to investment in renewable power generation in OECD countries. Money from the fund is set to be ready for investment by the end of the third quarter of this year.

Ingmar Wilhelm, the company’s managing director of finance in charge of the fund, says that “a strong compound annual growth rate of 22% in the UK’s renewable capacity from 2007 to 2013 indicates there is sustained developmental momentum behind several technologies in the country including onshore wind and solar photovoltaic”.

Changes to renewables subsidies across the wider EU have provoked a more negative reaction from investors in recent months.

The Spanish government’s decision to discard its feed-in tariff system has resulted in a number of key investors in renewables contesting the decision through the courts. ( see EDEM 23 May 2014 )

There is also fear that Italian government plans to reduce subsidies for renewables producers could curb the growth of the country’s clean energy sector ( see EDEM 27 May ). Henry Evans

By Henry Evans