The UK loses its lustre as a destination for renewables investment

Following fresh insight into the attractiveness of the UK as a location for investment in renewable energy, Ben Warren and Klair White explain the factors marring Britain’s appeal.

The Conservatives’ surprise victory in May’s election is something of a ­double-edged sword for the energy sector. Pre-election policy uncertainty is over and the end of a coalition government should mean less political wrangling and greater expediency in the legislative process. Utilities are also likely to be relieved to escape the potentially more draconian energy market reforms proposed by the Labour Party, including price freezes and tighter regulation.

However, the Conservatives’ manifesto is also painful reading for the renewables sector, no longer able to rely on the challenge posed by the Liberal Democrats to add a splash of green to the energy agenda.

The government’s pledge to scrap all subsidies for new onshore wind projects (confirmed last week) and devolve decision-making powers on planning applications to local authorities has left the wind sector perplexed, and cast a shadow over the estimated 7GW of projects in the pipeline.

Meanwhile, the complete omission of solar from the Conservative manifesto has left this previously burgeoning market with little visibility on its role in the future energy mix, despite experiencing record growth in 2014 as installations increased 79 per cent to almost 5GW.

The frustration of both sectors arguably stems from the inconsistency between the government’s rhetoric and its actions. Despite championing a liberalised and market-driven energy sector, generation mix technology choices are clearly being made, though apparently ignoring market signals that onshore wind and photovoltaics can deliver affordable and dispatchable energy.

This is even more confusing given strong evidence that costs have further to fall. A recent report from the UK’s Onshore Wind Cost Reduction Taskforce, backed by major industry players, estimates an average reduction of 22 per cent on today’s costs if certain recommendations around consenting processes and grid connection are implemented, taking onshore wind costs below those of combined-cycle gas generation.

Quickly becoming one of the country’s cheapest sources of energy, the government’s withdrawal of support for onshore wind therefore contradicts its pledge to reduce emissions at least cost.

Energy prices could actually be pushed up as more expensive sources, such as offshore wind, are used to fill the capacity gap as onshore wind projects fall away. The manifesto justification that “onshore windfarms often fail to win public support” is also at odds with the government’s own recent surveys showing support at 68 per cent.

On the flip-side, surveys by the Department of Energy and Climate Change (Decc) have repeatedly shown that the public generally oppose fracking and nuclear power, two of the government’s big energy bets.

Even the Electricity Market Reform (EMR) contracts for difference (CfD) auction process appears to be increasingly turning into a quasi-public/private partnership. Again, contrary to a market-based approach, it is being overly prescriptive on technology categories and allocating a budget that many believe is too weak to support sufficient capacity to achieve energy security. The government appears to be backing more expensive projects while prematurely accelerating competition for cheaper sources in a way that risks rendering projects non-viable or fails to achieve sustainable market-based cost reductions.

In February’s debut CfD round, for example, solar photovoltaics were awarded just 72MW of the 2GW of capacity contracted, with 1.2GW and 749MW going to offshore and onshore wind respectively. However, two of the five solar projects have since withdrawn from the CfD register, deemed to be undeliverable at the awarded strike price of £50/MWh, being close to the retail spot price of around £44/MWh.

This could spur calls for a bid bond mechanism to mitigate the risk of developers bidding too low and then dropping out, though regardless, it means that few new large-scale solar projects will be brought online in the UK until after 2016.

The government does, however, seem to advocate smaller-scale solar projects (increasing the permitted development threshold for commercial rooftop solar panels installations from 50kW to 1MW) and community-based schemes. These sub-­sectors have merit, but the shift of focus away from large-scale renewables raises questions about this government’s view on the real role renewables have to play in the UK energy mix.

It is not all doom and gloom, however. The government has reaffirmed its commitment to the Climate Change Act and a strong global pact in Paris this December. Many have also hailed the appointment of Amber Rudd as energy secretary as a positive sign, given that she has historically championed a low-carbon economy and supported rooftop solar.

Against this, the government is continuing to show fierce opposition to setting a 2030 decarbonisation target, which many claim would provide the sector with the long-term certainty it requires to spur investment.

The new government’s pledge to hold a referendum on UK membership of the EU within the next two years has also prompted some nervousness around long-term investment and could see energy companies developing contingency plans in the event of an “out” vote. Saying that, few in the market seem to foresee appetite to undo the current EMR programme, one of the government’s flagship policies.

What is clear is that the Conservatives will not be winning the award for “greenest government ever” any time soon. However, this election outcome should provide some much-needed political stability, and offers the government a unique window of opportunity to reconcile its somewhat contradictory energy objectives, assess the questionable success of EMR and address the conflict between its liberalised market rhetoric and policy that is clearly picking winners and losers regardless of market signals.

Ben Warren, power & utilities corporate finance leader, EY, and Klair White, Renewable Energy Country Attractiveness Index editor