FOR many in Scotland’s renewable energy industry, Thursday could prove to be a long day in the office.
At 7am National Grid will announce the results of the sealed-bid auction for the new Contracts for Difference (CfDs) mechanism which will subsidise low carbon energy generation projects in the years ahead.
CfDs are a key plank of the UK Government’s sweeping Electricity Market Reforms which aim to decarbonise electricity generation, keep the lights on and minimise bills for consumers.
Under the first auction for the contracts, which will replace the current Renewables Obligation (RO) due to be phased out by 2017, developers of projects based on established technologies such as solar, hydro and wind have submitted bids containing the lowest guaranteed price they would accept per megawatt hour (MWh) of electricity generated. Awards will be made on a technology-neutral basis to the lowest bidders.
According to energy lawyer Michael Murphy of MacRoberts, the change for the industry is “seismic” and could have major implications both for Scotland’s green energy targets and its ability to generate energy.
“I’m not sure that outside of the industry many people realise just how drastic a change this is,” said Murphy.
He said that under the RO subsidy system developers were “pretty much guaranteed” they would get subsidies, provided they ticked certain boxes. “A gold rush was deliberately created so that the country could quickly build expertise and make a headstart under 2020 targets. Now the government has realised it has made quite a good start but it is costing too much money and is introducing a mechanism that will primarily be attractive to the big projects needed to hit the UK’s climate change targets.”
Murphy said the Scottish Government will be more nervous than most about the results this week, warning that “CfDs could be the death knell for its very ambitious targets”.
“They are dead set against new nuclear and are banking everything on the big offshore wind projects getting support under a CfD system, which is effectively a lottery.”
Niall Stuart, chief executive of trade body Scottish Renewables, said it will be a “huge week for the sector”.
“In many ways this week is the culmination of years of changes to the way that the UK supports investment in clean power generation from renewables, nuclear power and carbon capture and storage.”
Stuart said much of the focus would fall on the outcome for offshore wind projects planned off the east coast of Scotland.
“This is effectively a ‘winner takes all’ situation: there’s enough budget to support one or two developments at most, with as many as eight projects potentially submitting bids,” said Stuart. “The outcome of this process will have a critical impact on our target for Scotland to generate the equivalent of 100 per cent of its electricity from renewables by 2020. We need a big chunk of offshore wind to do that, and at the moment we only have one small project in operation, and one with a pre-agreed contract from the UK Government.
“Together they only form about a quarter of the capacity we probably need to hit the overall target so we need to see more projects coming through if we are to make it.”
At an industry conference in Aberdeen last month, Scottish energy minister Fergus Ewing expressed confidence that at least one Scottish offshore project would be successful in the auction, although he was critical of how little influence Holyrood has over the process.
“It is not right that we in Scotland have such a limited say in how Scottish taxpayers’ money is spent, given that there is such strong support for renewables in Scotland, but I am sure we will have a favourable result in this auction,” he said.
While developers who are unsuccessful in this round will be able to bid again in the next round, which opens this autumn, David Bone, head of energy and natural resources at Harper Macleod, said that would not be without difficulties, particularly for offshore projects.
“They would have to try to keep their project on track – and people employed – until they can bid again in October 2015, with no guarantee that they will be successful second time around,” he said.
Keith Patterson of Brodies – which has a number of clients bidding in the first CfD round – said that although it would be a “nervous time” for developers looking to get projects started in the months ahead, the outcome would also have an impact on sentiment for long-term investment in the sector.
“It will be interesting to see what the continued appetite of developers is beyond the next three or four CfD auctions,” Patterson said. “At the moment, it looks like quite a risk for them as it is difficult to assess whether projects will be viable.”
Although Thursday’s announcement will give the green light to some projects, Bone said the uncertainty which has surrounded the process was set to continue. “Even after Thursday there may be more questions than answers as the Department of Energy & Climate Change will publish only basic information on the successful bids, and no information at all on unsuccessful projects,” he said.
“There have already been a lot of changes to the CfD process and the amounts of money available in the various pots as the process has been refined and it remains to be seen whether future governments, of whatever colour, can provide the industry with the confidence that sufficient money will be available to meet existing targets and those that still need to be set, to allow the industry to move forward with assurance beyond 2020.”
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