ECEM: UK’s new CfD scheme to bring capacity ‘draught’

The UK’s contracts for difference (CfD) subsidy scheme for renewable power generation, which for new capacity will replace the renewables obligation certificates (ROCs) system, could lead to a deployment gap down the line, industry experts say.

Under the existing scheme, which closes to new capacity at the end in 2017, green energy developers receive a number of ROCs for every MWh of electricity delivered to the grid. Energy suppliers then buy the certificates to comply with a mandatory quota set by the UK government.

The new CfD scheme allocates government funding, linked to the wholesale electricity price, to a number of renewable projects arrived at through annual auctions. While perceived as less risky in terms of return on investment, the CfD system leaves no space for financial upside and is bound by a strict budget.

Under a programme called final investment decision (FID) enabling, the precursor of the CfD scheme, in April last year eight projects, with combined capacity of 4.5GW, were awarded investment contracts.

But the FID enabling contracts have already committed 58% of the funds available for renewables under CfDs until 2020-2021.

With many projects likely to miss out on investment as there are too few CfDs to go around, market participants say the sector could find itself lacking new capacity once the RO closes in 2017. “Some of the projetcs missing out on CfDs will eventually just shut down … and that could bring forward a generation crunch earlier than expected,” said a trader.

Gordon Edge, director of policy at lobby group RenewableUK told ICIS that “the very narrow gateway – that the budgeting under the levy control framework has made of the allocation process – makes development a very risky business”

He added that this could potentially shut “down the development pipeline, which would lead to a deployment drought several years down the line”.

SGH Martineau lawyer Neil Budd, who is active in the renewable sector, agreed, pointing out that a “a real slowdown in the market” will be triggered particularly for large solar projects. This is because the RO shuts down earlier for new solar installations, at the end of March of this year. This has so far led to a developers’ rush to get projects online before the cut-off.

Market expectation of the “slowdown” in development points to as early as the second quarter of this year. “We will probably see reduced deployment from April onwards,” said a broker from New Stream Renewable.

Meanwhile, over the longer term, the generation sector faces a change in the size of projects that will come on line because CfDs will favour projects that can leverage economies of scale. So installations around 10-20MW will no longer have a financial incentive to be built, sources say. To achieve a strong return of investment under a CfD the project would need to be of a larger size.

However the feed-in-tariff system remains in place for units under 5MW, which could attract interest. “Under the CfD scheme we will see developers scaling down and up their projects,” the same source from New Stream Renewable said.

The government received criticism from the National Audit Office last year when it exhausted a big chunk of the budget at the early auctions. Speculation followed regarding a solution to avoid constraints on deployment of renewable projects. “The government needs to adjust their budget for renewable projects to avoid a halt in the rolling out of green energy projects,” a second brokering source noted. Sophie Udubasceanu