Renewables in ‘no man’s land’ due to subsidy indecision

Renewables have become stuck in “no man’s land” due to a lack clarity on the future of low-carbon subsidies.

Aurora Energy Research said the government must decide whether to pursue a subsidised or subsidy-free route to the decarbonisation of the power sector. In the meantime, projects will be put on hold and investments delayed.

New research published by the market intelligence firm shows an extra 80TWh of annual zero-carbon generation will be needed to meet the target of reducing the carbon intensity of Great Britain’s power grid to 100gCO2/kWh by 2030.

According to Aurora’s modelling, falling costs will allow subsidy-free renewables to deliver up to half of this additional output.

The company estimated that the levelized cost of energy for projects commissioned in 2025 will be £43-50/MWh for grid-scale solar, £47-53/MWh for onshore wind and £52-62/MWh for offshore wind. This compares to £70-80/MWh for high-efficiency gas turbines.

If the government instead opted to deliver the 80TWh entirely from renewables supported by Contracts for Difference (CfDs) and costs came in at the higher end of Aurora’s projections, the additional subsidies would total £880 million per year for a portfolio consisting solely of offshore wind, and £550 million per year for a mixed portfolio which also included onshore wind and solar.

If costs came in at the lower end of Aurora’s projections the figures would fall to £400 million per year and £180 million per year respectively.

The government has committed to offering a further £557 million of annual subsidies in future CfD auctions. Aurora said the ramp down of the Renewables Obligation and Feed-in Tariff payments will allow the government to offer a total of up to £700 million of additional annual subsidies by 2030, without breaching its cap on low-carbon levies.

The carbon intensity target could therefore be met under the current funding allocation, if renewable costs fell quickly or the government allowed onshore wind and solar to enter future auctions.

Source: Aurora  Energy Research

Explaining the findings at an event in London, Aurora’s head of GB renewables, Hugo Batten, said: “We can continue to provide subsidies to bring on the requisite amount of renewables.

“This option has the upside of providing more certainty in hitting our carbon targets but continues direct government involvement and intervention in markets for the foreseeable future.

“The second is that alternatively we could go down the subsidy-free route and rely on markets to deliver the renewables required.

“This option provides much less certainty in terms of meeting our carbon targets – we essentially leave it to the market – but it keeps risk of the government’s balance sheet and reduces government driven distortions in the market.”

“At the moment we are in something of a no-man’s land,” he remarked.

Batten said the government seems unsure of which path to follow: “We’re are at risk of failing to fully commit to the first route – the subsidy-driven decarbonisation path – but still stifling and delaying the second route – the subsidy-free decarbonisation path”.

He continued: “The reason that this is so urgent and salient for us right now as an industry is for the first time we’ve got intrepid renewable developers… who have gotten or are trying to get subsidy-free projects of the ground as we speak.

“But they’ve rightly been challenged and constrained by concerned financiers who fear the price cannibalisation impacts of future subsidised renewables.”

He said the government also needs to decide what types of technologies it wishes to support: “The more of any single technology you have on the system, the greater the price cannibalisation impacts and the more you have to pay in top ups to strike prices.

“Conversely, with a mixed portfolio there are diversification benefits which helps mitigate the price cannibalisation… A mixed portfolio is a cheaper way of delivering our carbon targets.”

Source: Aurora Energy Research

Batten additionally highlighted the issue of how the amount of subsidies is calculated: “Getting reference prices right in the current CfD scheme is a really big deal. It’s critical to the amount of renewables that can brought under existing arrangements and correctly forecasting CfD budgets.”

He said until recently there was little difference between the baseload power price and the capture price for renewables, and both were significantly lower than the typical strike price.

“We’re now in a different world,” he explained. “If onshore wind, for example, were to be included in CfD auctions we could see assets bid below the baseload price but above their capture price.

“In this world, under the current government methodology, the government would assume it was making five pounds per megawatt hour on the deal but would actually be paying five pounds per megawatt hour to the onshore wind developer.”

He said unless the government changes its methodology it risks overspending on subsidies.

Note: All figures quoted are in 2011/12 prices.