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Analysis - UK delays vital wind investment contracts by six months

UK: Last week's revealing of the draft prices to be included in the UK's proposed feed-in tariff (FIT) regime was supposed to be the signal that triggered new wind investment after months of delays caused by regulatory upheaval.

UK investment contracts to be delayed
UK investment contracts to be delayed

However, the announcement’s impact now looks set to be undermined by changes made elsewhere by the UK government. The Department of Energy and Climate Change (Decc) has confirmed to Windpower Monthly that a programme designed to give wind developers a 12-month head start on the FIT regime being enshrined in UK law has now been delayed by six months.

Under its final investment decision (FID) enabling process, Decc in March proposed to sign investment contracts with developers of renewables projects with generating capacities of 50MW or over. These contracts were meant to guarantee that projects would receive the FIT based on the draft prices, giving developers the financial certainty of making FIDs on their projects well before the energy bill, which will include legislation establishing the new FIT regime, is passed as law by UK parliament next year. But in an update on the FID enabling process published at the same time as the draft FIT prices last week, Decc revealed that the draft prices would no longer be used as the basis for the investment contracts. Instead, developers must now wait for the final prices to be published in December.

This delay is the knock-on effect of Decc requiring more time to work out the clauses that will be included in the contracts for difference (CfD) to be signed between the government and developers under the new FIT regime. Under the CfD FIT system, generators will receive a top-up payment when the wholesale electricity price is below a pre-agreed "strike price", and pay money back when the price rises above it. This mechanism will be introduced in 2014 when the energy bill becomes law, but generators will be able to choose between the current renewables obligation (RO) system and CfD until 2017.

The draft strike prices announced last week are largely in line with the current RO, with offshore wind priced at £155/MWh (EUR 183/MWh) and onshore at £100/MWh up until 2016/17. Prices will decline from 2017-19 as a result of falling technology costs. By 2019 offshore will be £135/MWh and onshore £95/MWh

Decc had originally planned to publish a form of the CfD contract this month, but is now committing to publishing only key CfD clauses in August, with a final CfD contract not published until mid-December, along with the final strike prices.

"As a result, investment contracts, which will closely follow the CfD, will now be available to be offered to successful applicants in December, rather than July/August under the previous plan," a Decc spokesman said.

"Investment contracts will now be signed and laid in parliament in February/March 2014, rather than Autumn 2013."

The spokesman added that by using the final strike prices rather than draft prices as the basis of the investment contracts, there would be "less risk associated with these contracts". However, the electricity market reform (EMR) process that led to the energy bill has long been accused of creating risks and uncertainty that stifle investment. With investment contracts now only likely to be signed several months before the energy bill becomes law, the government stands accused of resigning itself to little wind investment taking place over the next year.

"The pushing back of the FID-enabling programme by six months has been done without enough thought on its impact," said Munir Hassan, head of clean energy at CMS Cameron McKenna, the law firm that advised government on the UK’s previous EMR process in 1990.

"The point of FID enabling is to avoid an investment hiatus. With this delay, government seems to have resigned itself to allowing a hiatus."

Indeed, far from the strike prices announcement being the one that got investment moving, particularly in offshore wind, developers continue to play a waiting game.

A spokesman for Statoil, which is currently developing the 560MW Dudgeon offshore wind farm off the Norfolk coast with StatKraft, but had yet to make its FID for the project, said the company was still waiting to see more detail around the CfDs before it could proceed.

"It’s too early to say how the terms and conditions could apply for the Dudgeon project, and we will also need to take into account further details about the scheme due later this summer," said the spokesman.

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