Subsidy: the big difference

The 15-year CfD subsidies offered by the government guaranteed the economic viability of eight key projects, but that left 49 projects high and dry. Nigel Hawkins looks at the winners and losers.

In recent years, despite considerable political thrust, renewable generation has experienced challenging times. Constant changes in government policy have been a major hindrance as project developers seek to raise funds to enable projects to reach financial closure.

Since the raising of the requisite finance is, in many cases, dependent on the level of government subsidy – through 15-year contracts for differences (CfDs) – renewable generation is hardly market-driven. Success or failure is predominantly determined by the scrapping for public subsidies, and it is not a pretty process.

Nonetheless, with considerable fanfare, and after a lengthy delay, the government proudly announced in April that eight renewable projects would be backed by 15-year CfDs.

Energy secretary Ed Davey declared that “these contracts for major renewable energy projects mark a new stage in Britain’s green energy investment boom”. However, backers of 57 renewable projects had applied for CfDs, so 49 went away empty-handed – at least for the moment. Further subsidy tranches are planned.

The eight successful projects covered capacity of 4,548MW, around 60 per cent of which is for offshore wind plant. The stand-out winners from the government’s announcement were undoubtedly the ­Danish-based Dong Energy and its partner Wind Power.

The largest scheme backed by CfDs is the Hornsea 1 offshore wind project located off the Yorkshire coast, with a formidable 1,200MW capacity. Importantly, Siemens is building a wind turbine manufacturing plant in nearby Hull.

Under the same Danish ownership structure, the government has also undertaken to support the 660MW Walney Extension, 19km off the Cumbrian coast, and the 258MW Burbo Bank Extension further down the coast off Liverpool.

Two other offshore wind projects have also received financial backing, notably the 664MW Beatrice project in Scotland. With the forthcoming independence referendum, it would have been short-sighted politics to turn down all the Scottish applications. The 402MW Dudgeon project off Cromer in Norfolk is also included.

Beyond offshore wind, just three other projects made the cut to qualify for 15-year CfDs. Most significantly, one of Drax’s units qualified for biomass conversion. But there was discernible disappointment that, for the moment at least, CfD backing was limited to Drax’s third unit.

Indeed, Drax chief executive Dorothy Thompson, said at the time: “We are disappointed by today’s decision on the ineligibility of our second unit. Nothing has changed, as far as our plans are concerned, between being deemed eligible in December and now. We have, therefore, commenced legal proceedings to challenge the decision.”

It is not every day that a one-time FTSE-100 company takes legal proceedings against a government that is providing it with copious subsidies.

A further 420MW biomass conversion project at Lynemouth in Northumbria also secured funding. Interestingly, given the government’s recent aversion to funding dedicated biomass schemes, the 299MW MGT Power was awarded a CfD, but it does come with a substantial combined heat and power element.

For these subsidised renewable generation schemes, April’s announcement brought good news, unless you were providing financial backing for Drax.

For 49 of the original 57 applicants, though, the announcement brought only disappointment. Some may succeed in subsequent CfD tranches, but further delays are unlikely to help these projects come to fruition.

Several of the 49 may have collapsed already while most will simply be “parked”as potential backers assess the way forward – if there is one. At a general level, the combination of tight government finances and the fact that only a few relatively large projects are needed to reach the 2020 renewable generation targets means that a swathe of future CfD-backed subsidies for renewable generation will not be forthcoming.

Without a sizeable CfD subsidy, few of the 49 passed-over projects are likely to proceed. Offshore wind costs may drop substantially by 2020, but it will be many years before they get close to the average unit production costs of fossil fuel power.

Of the rejected 49, arguably the most high-profile casualty is the 2,000MW Eggborough coal-fired plant, whose future looks very bleak without a substantial CfD subsidy.

Indeed, if nearby Drax did not need such lavish subsidies, Eggborough’s plight would probably be less parlous. Quite simply, funding both the Drax and Eggborough conversion costs is too expensive, so Eggborough seems likely to be sacrificed.

Similar conclusions apply to RWE’s plant at Tilbury, whose planned conversion from coal to wood-fuelling has now been effectively abandoned. Closure seems the inevitable conclusion.

At a lower level, many smaller renewable generation energy schemes will inevitably die as they fail to secure finance, even if they have already negotiated the many complex planning requirements. In particular, dedicated biomass schemes are suffering. Technically, many are quite complex, irrespective of the challenges of the planning regime and the difficulties of securing finance.

In truth, it is difficult to see how many small renewable projects can proceed without a long-term CfD. In most cases, the financial model will not stack up unless such subsidies are added to projected revenues.  

More generally, the development of renewable generation since the 1980s, when the Thatcher government sought to assess the most viable sources, has been erratic.

For many years, the big six energy companies were the driving force as the UK sought to build on the network of SSE’s long-standing hydro-electric plants. Eon and the RWE-owned Npower were prominent in this respect.

In Scotland, SSE and the Iberdrola-owned Scottish Power invested heavily in onshore wind.

Since such plants were fairly straightforward to build, they began to dominate new renewable energy output. However, onshore wind is now increasingly constrained by political and environmental concerns, as witnessed by the many projects recently turned down by the Department for Environment, Food and Rural Affairs.

Nowadays, climate reduction targets – for better or for worse – are crucial. Under the Energy Act 2013, a new subsidy regime has been put in place, which aims to equate the payment of subsidies with the projected output necessary to meet the UK’s environmental obligations.

What is undeniable today is that much of the renewable generation sector is subsidy-driven. When the electricity supply industry was broken up in the late 1980s, it was argued that electricity generation should become a genuinely competitive industry. Such aspirations, especially with regard to renewable generation, have long since been jettisoned.