Auction could scupper new UK renewables subsidy regime - developer

02 June 2014 17:35 Source:ICIS
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The introduction of a competitive bidding process to the first round of the UK’s impending subsidy regime for low-carbon power generation could backfire, according to the chief economist of a leading renewables developer.

Under the contracts for difference (CfD) scheme, designed to expedite the deployment of new renewable energy capacity, a group of established renewables technologies will compete in an auction for the first allocation of contracts later this year.

The move, which was announced by the Department of Energy and Climate Change (DECC) earlier this month, marked a shift from its original intention, which was to award contracts on a first come first served basis.

But RES Group chief economist David Handley believes it is too soon for the scheme to take on a competitive format.

“The premature introduction of an auction has the potential to damage a robust policy framework as the auctions could be oversubscribed,” Handley said at ecoConnect’s Green in the City forum on the future of UK onshore wind last week.

“With the level of wind and renewables entering, developers could bid in incomplete information, pushing themselves to deliver for the lowest price possible and then find, later on, that they can’t deliver on the contract itself.

“I have an awful lot of confidence in what can be delivered through the CfD scheme. But there is a real risk in how you access that contract,” Handley added.

However DECC head of onshore wind Elin Williams, also speaking at the event, was optimistic ahead of the first CfD process. “We’re well on track for the first allocation rounds in October,” Williams said.

Technologies categorised in the established group include onshore wind and solar projects above 5MW in capacity, and energy from waste with combined heat and power (CHP).

DECC has also kept open the option of moving technologies of a “less established” status to auction, including offshore wind, if the number of applicants exceeds the allocated budget this October.

Challenge for onshore wind

Handley said there were already clear signs that the pipeline of onshore wind projects under development was shrinking and that threats to subsidy cuts would undermine attempts to reach 2020 targets.

But Williams reiterated that DECC is intent on meeting its long-standing target of 11GW to 13GW of total installed onshore wind capacity by 2020. “The ambition hasn’t changed,” she said.

According to trade association RenewableUK, 7.2GW of onshore wind capacity is connected to the grid, with a further 1.8GW under construction and 4.5GW granted consent.

But the association advised the government last week not to rest on its laurels in attempts to meet both onshore and overall renewables targets, warning that around 10% of approved onshore wind projects – approximately 450MW – will fail to materialise between now and 2020.

Conservative plans to place large-scale onshore wind farm applications into the hands of local planning authorities if they win the 2015 election were also met with a lukewarm response by Handley, who said it would “inevitably become harder” for the industry to continue its progress.

“With local councils, there will be a strong element of members saying ‘we want it somewhere else’”, Handley said.

But Forum for the Future’s principal advisor on finance and energy Will Dawson said it would “not necessarily be the death knell” if projects had to go through the local planning process.

Political risk

Handley also said that political risk was now a sizeable consideration for renewables investors in the UK and could have “very severe and damaging implications for everyone investing in low carbon technology”.

On Monday, Ernst & Young’s latest quarterly index on global renewable energy markets downgraded the UK in its ranking of countries with investor appeal.

“The recent carbon tax freeze, an energy market competition probe and Conservative Party plans to scrap onshore wind subsidies post 2015 are weighing heavily on the sector’s ability to assess the long-term outlook,” said the accountancy giant’s head of environmental finance Ben Warren.

“In addition, the launch of a government consultation on future financial support for solar has taken the shine off the UK’s otherwise booming solar market.”

Ernst & Young’s stance is in contrast to the more upbeat appraisal offered by ratings agency Standard & Poor's earlier this month, which was backed by other investors who regard the tougher stance on subsidies as positive evidence of the sector’s much-needed progress towards cutting costs ( see EDEM 29 May 2014 ). Henry Evans

By Henry Evans