The dust has now settled on the government’s announcement on which technologies and companies have won low carbon energy contracts in the new Contracts for Difference (CfD) auction for renewable energy. Industry opinion seems to be mixed on the initial success of the auction, and its role in securing a stable and consistent framework for future investment in the UK industry.
CfDs are the new support mechanism for nuclear, carbon capture and storage and renewable energy introduced by the government to replace the main support for large-scale renewables, the Renewables Obligation (RO). The auction round has led to more than £315 million of new contracts being offered to five renewable technologies, including established technologies such as onshore wind and solar, and also less established ones such as offshore wind. In total, more than two gigawatts of new capacity could be built, and according to the Department of Energy & Climate Change, this will cost £110m a year less than it would have without competition.
It is encouraging 11 of 27 renewables projects to receive a CfD will be in Scotland. The Scottish Government has been quick to point out that onshore wind is now cheaper than new nuclear, and when these 11 projects are constructed, it is anticipated they could generate enough energy to power the equivalent of more than 600,000 homes in Scotland.
However, despite a recent increase to the budget for projects bidding for the CfDs, there is still concern that the funding available, particularly for future rounds, is insufficient to support the capacity required to meet the UK’s 2020 targets or achieve energy security.
This is exemplified by the fact that the budget only met the requirements of two offshore projects, and with offshore developers said to be spending in the region of £15-£20m on their projects to simply get to the auction participation stage, a funding pot that does not provide the necessary levels of certainty is an unattractive and risky proposition. In addition, some developers in the solar industry have also found the results disappointing with solar having to compete for CfDs with technologies that have been established for over a decade, such as onshore wind.
With no indication of the size of the budget that will be available for future rounds, and competition for support set to increase (particularly from onshore wind) as the RO reaches its end date for new entrants, it is essential DECC gives clarity on future budgets. There is an increased rush by developers and lenders to have projects commissioned prior to the expiry of the RO and investors are making short-term business decisions to be able to stick with the RO.
So, what are the next steps for the industry? There are developers who now need to build their projects, the unsuccessful CfD participants who need to look at their projects again and contemplate future bids, and there is the government which needs to show commitment to the industry and provide the clarity and certainty required in respect of future CfD budgets and allocation rounds.
The developers offered contracts have until 27 March to sign. In proceeding, they will be required to achieve a number of agreed project development milestones – failure to meet these could result in contract termination and loss of support.
For developers who were unsuccessful in the CfD auction, or developers looking to enter future CfD rounds, the uncertainties around why bids were not successful, what the next allocation round will hold, how competitive is it likely to be, and what the budget will be set at, are all questions needing answers to allow parties to plan for the future.
It is estimated a total CfD budget of £1bn remains to be allocated between now and 2020-21, but the size of each allocation round is unknown. DECC has said that if the next allocation runs to the same timetable as the recent round, draft budget information for the next round will be available in July with the final budget confirmed in October. However, there is little certainty over what support will be available for the industry beyond this date.
In addition, the industry is wary of what a change in UK government could mean for investment in new power projects. It is key for the industry to have a stable policy framework to ensure the ultimate success of EMR and the CfD regime in securing future investment in the UK’s energy industry.
• Peter Ward is a Senior Associate, Burness Paull www.burnesspaull.com