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United Kingdom

United Kingdom

Government moves to allay fears over subsidy changes

UNITED KINGDOM: Industry welcomes review of power-purchase-agreements but criticises latest draft energy legislation's lack of details on prices.

Fears that proposed changes to renewables subsidies will leave independent developers unable to secure long-term power purchase agreements (PPAs) have forced the UK government to further review its electricity market reform (EMR).

Under the proposals originally published in December 2010, the UK's existing renewables obligation (RO) subsidy would be replaced from 2017 by feed-in tariffs with contracts for difference (FIT CfD), under which low-carbon generators would negotiate contracts for the electricity output of their plants on the wholesale market and receive a top-up payment or pay money back when the contract price differs from the wholesale price.

However, wind developers and bankers have lobbied the Department of Energy and Climate Change (Decc), arguing that the removal of utilities' obligation to purchase renewable electricity under the RO mechanism would make it very difficult for independent developers to secure long-term PPAs at rates deemed acceptable to banks. This would make it hard for projects such as onshore wind farms to secure finance.

In response, last month's publication of draft legislation to implement the EMR included a commitment by Decc to issue a call for evidence this month that would "seek to understand any barriers to a competitive PPA market in the current arrangements, and in the future when EMR measures are implemented".

"Independent generators have been saying that there are real problems with bankability for their PPAs, even before these reforms," energy and climate change minister Ed Davey said at the launch of the draft bill. "We want to make sure that this process will improve their position, and that is why we have made this call for evidence."

Industry body RenwableUK welcomed the fact that Decc had listened to its members' appeals, but warned that no promises had yet been made and there was little time to address the issue before the legislation is put before parliament this autumn.

Gordon Edge, RenewableUK's policy director, said it would be working with Decc and representatives from the finance sector to look at potential solutions.

"The least worst option would be a buyer of last resort," said Edge. "This would be a body such as the Non Fossil Fuel Purchasing Agency (NFPA), offering bargain-basement long-term PPAs, so that independent developers have certainty that they would be able to sell the electricity from their projects. This would very much be a stop-gap measure, and developers would be free to negotiate better PPAs with utilities in the meantime."

Edge criticised the draft legislation for failing to add much detail to the original proposals of 2010. In particular, the bill confirms that final decisions on the "strike prices" at which the FIT CfD will pay out will not be made until late 2013. However, Edge added that he would urge members planning major offshore wind farms to consider taking advantage of the provision for interim FIT CfD strike prices to be set by Davey on a project-by-project basis. These special arrangements would apply to any projects unable to secure an RO subsidy by the time they become operational, but in need of a final investment decision before the strike prices are set in late 2013.

Both large-scale offshore wind and new nuclear power plants are likely to be eligible for this special arrangement.

Also in May, the Office for Nuclear Regulation revealed that it was in talks with EDF over possible lifetime extensions of its eight operating nuclear power plants. Environmental campaigners complained that this would damage renewables.

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