Have UK renewables peaked?

Impressive renewable generation output is the result of past initiatives, but two heavyweight reports question whether current policies will keep up the momentum.

Claire Perry wants to bring the next round of global climate change talks in 2020 to the UK. And on the back of figures showing ever-rising renewable generation in the country, the energy and climate change minister can make a pretty good case for British leadership on global efforts to tackle carbon emissions.

However, Perry may have a more tricky tale to tell two years from now if the trends highlighted in a report published last month bear fruit. It was one of two reports appearing on the same day that might have caused a few red faces at the Department for Business, Energy, and Industrial Strategy (BEIS).

The first is a report on green finance, published by the House of Commons Environmental Audit Committee, which warned about a “dramatic and worrying collapse” in clean energy investment, down 56 per cent over the past year, according to Bloomberg figures. The committee urges the government to review the CfD (contracts for difference) scheme before the next round of auctions takes place in 2019.

Ministers today are able to bask in the increasing share of electricity generated by renewables. But that output is largely the legacy of the support provided for projects through mechanisms such as the Renewables Obligation and feed-in tariffs, which have mutated or been cut back in recent years, says Nick Molho, executive director of the Aldersgate Group.

“The drop in investment seen recently is a result of a lack of political decisions dating back a few years,” he says. While investment in renewable energy will see a fillip thanks to last September’s CfD auction, he expects renewable investment to be stable rather than sharply increasing, which is what is needed to meet carbon reduction targets.

Gareth Miller, chief executive of Cornwall Insight, believes the dismal picture painted in the committee’s report is “slightly misleading”. Over the next two years he reckons there is £10-15 billion-worth of investment in new projects due to come on stream. “There are several gigawatts of offshore wind projects already in receipt of CfDs going for financial close and already seeking equity or debt,” he says, adding that next year’s CfD auction is likely to result in another spike in offshore wind investment.

Molho says the existing pipeline of projects should enable the government to secure an additional 10GW of offshore wind by 2020. Beyond that, though, lack of policy certainty means the picture looks more tricky.

The lack of clarity about the future of CfDs (the government has only committed to one more round of auctions) is already suppressing investors’ appetite for UK clean energy, says Molho. “We need policy detail to create a project pipeline that developers are willing to invest in,” he says.

Projects such as offshore windfarms require an eight to ten-year lead-in time from when they are first proposed to generating electricity, he explains. Without greater certainty, chunks of the highly specialised wind energy supply chain will close down or reduce operations, increasing the risk of spiralling costs when orders are placed.

“Ad hoc auctions announced shortly ahead of time doesn’t match business reality,” says Molho. “If you want projects to get built and keep costs down, you can’t go auction by auction, you need more clarity looking ahead.”

The call for greater certainty is amplified in an Energy UK paper published on 23 May, which sets out the industry body’s vision for the five-year review of the Electricity Market Reform. This calls on the government to allow renewable projects to partake in the capacity market.

However, the capacity market auction process itself is looking tarnished thanks to the second report published last week, a probe by the National Audit Office into how CfD contracts were awarded. This found that consumers will pay £1.5 billion more than they needed to because of the way the scheme is designed.

The rules for last September’s auction had bids ranked according to how cheap they were. Each bid was then valued based on its strike price multiplied by load factor. Projects that breached the amount of generating capacity left over were knocked out. Smaller projects could qualify as long as they didn’t breach the cap.

The result was a lopsided auction, which saw three successful mega-windfarms swallow 32GW of the 33GW of capacity awarded. The remaining gigawatt was parcelled up between eight fuelled minnows.

But the strike price for one of the auction years was set by relatively tiny and more expensive projects, which secured CfDs, meaning that one windfarm netted £100 million more per annum than it bid for over a 15-year period.

Jonathan Marshall, energy analyst at the Energy and Climate Intelligence Unit, says: “One project took it over the level and set the price for all other projects signed for delivery that year. The price for all the electricity over 15 years has been set by a small energy-from-waste unit.”

There must now be a question mark over whether offshore wind should be competing with the generally less established technologies at all, says Marshall. “It’s difficult to see how it can still be classed as a less established technology. Keeping it separate seems odd: it’s not an industry that needs to have its hand held anymore,” he says.

The answer, though, is not to junk the system of competitive CfD auctions, says Molho. “The government has provided a clear public policy structure that encourages private competition and means consumers will get value for money,” he says.

He argues that the government should use the first anniversary in October of the Clean Growth Strategy to publish proposals on how it will turn its vision into practical policy.

Unless this happens, the UK’s climate change claims will be resting on shaky ground. “If we don’t move, we will lose this climate leadership that the UK likes to show itself having on the world stage,” says Marshall.