The renewables industry has raised concerns that the government’s package of policies designed to boost low-carbon forms of energy — which includes reform of the electricity market — has lowered its ambitions for onshore wind.
The Renewable Energy Roadmap, published last month, contradicts earlier commitments for onshore wind development by stating that the onshore wind industry could achieve up to 13GW by 2020. The Department of Energy and Climate Change (Decc) has been quoting 14.8GW for the past three years for onshore wind potential, most recently in last year’s National Renewable Energy Action Plan. A separate study carried out for Decc by consultants AEA Technology also came up with 14.8GW.
The roadmap claims the 13GW does not represent a target or level of ambition. But Gordon Edge, policy director at trade body RenewableUK, said that the figures did not make sense. "Wouldn’t you want as much onshore wind as possible, because that way you meet your targets in the cheapest way possible?" he asked. RenewableUK has called for a meeting with officials from Decc and the Treasury to discuss its concerns.
The government has at the same time become more optimistic about offshore wind, which it now believes can achieve up to 18GW by 2020, up from the 13GW recommended by the Committee on Climate Change in advice published in May.
Achieving this increase will require a substantial reduction in offshore costs, notes Decc. It is establishing an industry task force to work out how to cut the cost of offshore wind from its current level of around £140/MWh (€155/MWh) to £100/MWh by 2020.
The government will also provide £30 million over the next four years for offshore technology development and demonstration, and to establish an offshore renewables technology and innovation centre. It also announced that offshore wind-farm developers would be entitled to compensation if leases awarded to them were withdrawn in the event of oil and gas reserves being found in the area. This has been a major barrier to obtaining finance and has increased costs for offshore wind.
Low-carbon cost cutting
The electricity market reforms are aimed at reducing the cost of capital for low-carbon generation. Decc has confirmed the replacement of the renewables obligation (RO) — under which electricity suppliers receive certificates to show they have obtained the required percentage of their electricity from renewable sources — with a system of long-term contracts. These will be feed-in tariffs with contracts for difference (FIT CfD) whereby low-carbon generators will 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.
The FIT CfD will be introduced in 2014. Electricity generators will be able to choose whether to earn support under RO or FIT CfD until 2017, after which RO will be closed to new applicants. Edge said this timetable seemed reasonable as it would give people time to get used to the new system. However, Simon Hobday, a partner at law firm Pinsent Masons, warned that the transition from ROs to FIT CfD might, depending on the specific drafting of the power-purchase agreement, leave projects that were financed before the credit crunch faced with refinancing at a higher cost.
The government believes that support under this form of FIT will cost it 30% less than its other option of a premium FIT (PFIT). The PFIT is a static payment generators receive in addition to their revenues from selling electricity in the wholesale market. Many renewable-energy players had said they preferred the PFIT due to its similarity to the current system.
However, Decc calculated that a PFIT would not reduce the cost of capital for wind, whereas the FIT CfD would see costs fall by up to 0.3% for onshore wind and up to 0.8% for offshore. The FIT CfD would also reduce consumer bills by 6% as opposed to 1-5% under the PFIT. Consumer energy bills are a political hot topic in the UK, with coverage of the reforms in the national press dominated by these concerns.
A controversial proposal to set the level of FIT CfD through a new auctioning system will be delayed until after 2020. This was a victory for the renewables industry. It is also pleased that the government will vary the key features of the FIT CfD according to the type of generation. The price for wind will be based on the day-ahead market rather than Decc’s original suggestion of an annual power price, which would have disadvantaged wind.
"You don’t fully capture the price in the day-ahead market, but it’s more manageable [than using the annual price] and the better you are at forecasting the output 24 hours ahead, the better you will do at fixing your income level," said Edge.
Other reforms include the introduction of a carbon-price floor to provide a stronger incentive to invest in low-carbon generation. This will be set at £30 per tonne of CO2 in 2020 rising to £70 in 2030. The government admits that this will not be enough to encourage the investment needed for renewables, but it believes that it will be sufficient when combined with the FIT CfD. At the same time, an emissions performance standard of 450 grams of CO2 per kilowatt hour should disincentivise new coal-power stations being built without carbon capture and storage technology.
However, the Scottish government and environmentalists criticised the reforms for providing subsidies to nuclear power through the back door. The carbon-price floor will give nuclear generators windfall handouts of £50 million, compared with £25 million for renewables. Green Party MP Caroline Lucas called for a windfall tax on nuclear to be levied alongside the carbon-price floor.
First Minister Alex Salmond, the Scottish government head, said he was against support for new nuclear. "Every pound spent subsidising this expensive and unpredictable technology of the last century is one pound less available for investment in future growth of renewable generation," he said.