This piece is part of our special report on energy policy. To read the first piece in the series, click here. To read the second piece in the series, click here.
Energy policy isn’t easy. It requires government to steer a path through environmental priorities, energy security and job creation, and to do so under an intense media spotlight—“climate change,” “power blackouts” and “plant closure” all make for easy headlines. As we approach a general election, the obstacles in the government’s path are compounded by public attention turning towards the cost of energy for the British consumer.
Where is UK policy taking us? Are we still on a path to a renewable future or has the financial crisis supplied a pretext for revisiting the balance between environmental ethics and economic pragmatism? While the broad framework encouraging development of renewable power remains in place, a number of factors are exposing new renewables projects to a more stringent test of economic viability than has been applied over the last decade. The government is channelling the public mood by forcing capital costs of renewable technologies to meet subsidy levels that are declining over time, while simultaneously introducing competitive auctions to an industry accustomed to regulated subsidies.
Developers large and small are expressing their concern about these changes. This anxiety reflects the expense and effort they undertake to make a project ready for construction (or ready to tender for a government funding regime). These development costs range from several hundred thousand pounds for a solar park, up to £30m for a large offshore wind farm. Unsurprisingly, those developers who have already incurred such expense for a project, expecting a set level of government subsidy, are dismayed to learn that the recovery of their development costs now rests on the outcome of a relatively unknown competitive tender process.
If we take a step back, however, these grievances might be characterised as teething problems as the renewables market makes a necessary stride from infancy towards its teenage years. Certainly the impact of the new regime feels a little retrospective for those carrying legacy development costs (although strictly speaking it is certainly not retrospective), but perhaps it is reasonable to expect the government to find some kind of salve for this.
For future projects, its commitment to “price discovery” through competitive tender presents the market with a challenge—how much development cost should a developer commit to a new project when it is not yet possible to know what the operating revenues might be? It is difficult to imagine that developers will fail to find a way to deal with this, but the government may need to share some of these development costs if it wants to see deliverable, properly investigated projects bidding into its tender system.
It is hard to fault the shift to competitive tender. A range of renewable technologies now contribute meaningful volumes of energy. Future projects will compete across these technologies—solar, onshore wind, waste-to-energy—with the projects that require the least subsidy set to win. This new market model—where established renewable technologies compete against each other on a level playing field—is the last stepping stone to “parity,” where renewables jostle with conventional power without the need for any subsidy.
For newer technologies, the government will provide a more insulated revenue model to continue to foster what the sector has been synonymous with: innovation. These include offshore wind projects which will only compete with each other; tidal technologies, where specific subsidy regimes are in place or under consideration to carry pilot projects to fruition; and advanced conversion technologies that pioneer new levels of efficiency in extracting electricity from waste or biomass.
It is difficult to say when we will reach the mature phase of the renewables market. The new competitive tender model should certainly hasten the evolution of energy prices where falling costs of inputs such as solar panels, wind turbines, installation contracts, electrical systems and land rents will drive the market. Indeed, declining capital cost will not be a new phenomenon. In the last five years the cost of wind turbines has fallen by 45 per cent (calculated on price per projected megawatt hours of output). The cost of solar panels is also continuing to fall.
To put all of this government support for renewables in the right context, we must acknowledge the current dislocation of the UK energy market. While the Department for Energy and Climate Change (DECC) and other market sources are projecting that the UK’s generation capacity will come under serious pressure through this decade—resulting in a very real risk of blackouts—the supply/demand dynamics of today’s market are such that wholesale power prices are finding new lows. The punch line is that this dislocation affects new build conventional power as it does renewables so that gas fired and nuclear projects (both fundamental elements of the UK’s energy future) need their own levels of government support to ensure their viability. It is now a case of balancing one with the other.
The DECC estimates that £40-50bn will be invested in new renewable generation between 2014 and 2020, taking renewables from 15 per cent of the national generation mix to around 30 per cent. This investment will span all types of renewable generation and it is reasonable to expect that virtually all of it will be funded by private finance written against some form of government support. These projections reflect not just the policy imperative for a low-carbon economy; they also reflect the deficit created by programmed decommissioning of capacity that is reaching the end of its life or which is no longer environmentally acceptable. The industry will be eager to see that the subsidies offered for competitive tender each year (combined with the volumes for newer technologies) are enough to meet the 2020 target. If this is delivered, the big picture for renewables investment is assured.
