Change is coming

Written by Neil Evans on 26 September 2014 in Feature

The industry is gearing up for the first round of a major shift in the way renewable projects are funded, writes Neil Evans

Even before the Energy Act was put before MPs in Westminster in 2012, developers had been working with the spectre of change on the horizon.
As part of Electricity Market Reform, a new system with a different emphasis on how projects, be they wind turbines, tidal arrays, solar panels or combined heat and power plants, was to be introduced; it had three key aims: decarbonised energy generation, with a secure supply, which is affordable for the consumer.
While the eventual aim for energy generation is that it should not require subsidy, the technology being developed is at wildly differing stages and for now at least, much of it still requires a kick-start before it can reach a commercial stage.
Under the new Contracts for Difference, successful applicants are awarded a contract for a guaranteed ‘strike price’, meaning if the wholesale energy price is too low, they are topped up (and conversely, if it goes too high, they have to pay it back).
The crucial difference between the CfD and the outgoing Renewables Obligation scheme, introduced in 2002 which licensed suppliers to source a specified proportion of the electricity they provide to customers from eligible renewable sources, is that this is a competition.
In October the Department of Energy and Climate Change opens the first allocation round for CfDs.
With an estimated £205m split up with £50m for more mature technologies such as onshore wind, and £155m for less-established forms of generation such as offshore wind, marine and tidal, not all applicants will necessarily be successful and are bidding against each other to get their hands on the first CfDs. It is crunch time.
Iain Robertson, head of generation sales at SmartestEnergy, said: “CfDs, on the one hand, will help to control the budget, because of the competitive auction process.
“The idea is that they will encourage investment but also help to drive down cost as well as encourage developers to bid with the most economic projects. It is a pan-industry drive to lower cost in the sector.”
As a licensed supplier which purchases power from independent generators and sells to business consumers, SmartestEnergy will be one of a number of companies involved in Power Purchase Agreements allowing generators a route to market for the energy they produce.
The index-linked strike price is set for 15 years, irrespective of the wholesale power price during that time, which should lead to a stabilised income stream for developers and be more attractive to lenders who would be financing projects.
However, not all developers are happy about the system.
Along with Scotland’s independence referendum, Electricity Market Reform has been a major talking point for developers as they have debated what their investment plans should be for the future.
Gordon MacDougall, Managing Director of RES Western Europe, said the EMR process had become “heavily politicised” and that an opportunity had been missed to “genuinely improve investor confidence and make a better market for people to invest in.”
He said: “What we see now is much greater investor uncertainty, a much greater political risk in the sector and very much a constrained market.”
However, the other funding streams are not being scrapped immediately, ROs will operate in tandem up until 2017 for some forms of generation and only after that will CfD be the only means of subsiding for generation above 5MW.
MacDougall said his general expectation is that “most people where they can will stick with the RO for near-term projects and start to position themselves to get the first of the CfD beyond that.”
In the case of solar power, developers wanting to progress schemes beyond April 2015 now have no choice but to go for a CfD, with the RO for large-scale projects now removed and Roberston said: “What we’re seeing is yet another rush to get solar projects done throughout the winter – there may well be a lull after that depending on how much comes out the other end.”
The strike prices for different technologies also vary to reflect how close they are to reaching full viability, ranging from more than £300 per MWh for wave and tidal, up to £140 per MWh for offshore wind and around £90 per MWh for onshore.
With funding for the CfDs ultimately coming from the consumer, there are questions over the amount of subsidy available for projects.
In June eight energy projects, totalling 4.5GW of generation potential, were awarded “early Contracts for Difference”, they comprised five offshore wind projects including the 664MW Beatrice project in the Moray Firth as well as two coal plant conversions to biomass and a biomass combined heat and power plant.
Funding for the project, a joint venture between SSE and SeaEnergy Renewables that was granted consent in March, was welcomed in Scotland, but the National Audit Office raised questions over the award of so many early contracts which had not had to bid against their rivals.
In a report, it said it was “not convinced” consumers’ interests had been adequately protected in the award of £16.6bn-worth of contracts and that the scale of early contracts may have increased costs to customers, committing 58 per cent of the funds available to 2020/21.
Oliver Patent, senior project manager for Scotland at German-based renewables firm WKN AG, said the £50m budget for established technologies would result in an onshore wind capacity of about 500MW, provided no other mature technologies were rewarded, with the potential for 2,000MW between 2017 and 2020, but added that consented projects UK-wide totalled 4,000MW with still more in the planning system.
“Although CfD was intended to give more security to the operation of renewable energy projects, it does give a lot of uncertainty during the development,” he said. 
“A project has to be fully developed including consent, grid connection agreement and land leases to apply. 
“The development time for an onshore wind project is around five years, with a huge cost burden on producing an Environmental Impact Assessment, securing grid connection, wind measurements, signing of agreements, all on the risk that a CfD is rewarded. 
“Therefore, there is no security for the development, even if everything has been done right, that the project will ever be able to be built and operated and therefore the cost for the development be paid back.”
He added: “It can be assumed that a smaller developer might not want to or can’t take on this risk in the future, not knowing if their investment will ever pay off, but also larger companies might change their strategy on the development of onshore renewables in the UK.”
Patent added that although the change in funding had caused uncertainty, the Scottish Government’s stance on renewable energy, with ambitious targets on generation, had provided some certainty to developers.
MacDougall, who sat on the independent Scottish Government commission on energy, added: “Energy bills and costs are a political football right now and it’s trying to get the balance and trying to get what was one of the objectives of EMR at the outset.
“It was a cross-party supported initiative and it does need long-term sensible decisions being taken and we want to get back to that. Even the Scottish Government supported the principles of EMR at the outset because everybody was trying to push to get a long-term framework and that kind of long-term thinking has disappeared from this.”
Robertson at SmartestEnergy said while there were uncertainties on the budget further down the line: “The general principle of what is trying to be achieved is accepted. It will drive down costs in the competitive process.”
The UK is not the only place where the CfD system has been used and it has been used for other electricity markets.
Robertson added: “CfD will without a doubt bring in new interest from other parts of the world to the development side of things.
“We’re being contacted by people who haven’t developed projects in the UK before, clearly the CfD terms is something that attracts new players.”

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