Electricity retailers in the UK have to source a proportion of their power from renewables by buying renewables obligation certificates (ROCs). These will now be reduced by 10% to 0.9 ROCs/MWh from April 2013.
Renewables for subsidies have become extremely politicised in recent months, particularly for onshore wind. In February, more than 100 Conservative members of parliament wrote to prime minister David Cameron demanding bigger subsidy cuts for onshore wind. Chancellor George Osborne was reportedly considering a 25% cut.
The government consulted on the policy last October and an announcement has been expected for months. But the wind industry was left in limbo in mid-July when Decc decided to delay the decision.
When the delay was announced, energy minister Ed Davey denied there was a rift with the treasury department and blamed the delay on the complexity of the issue. But almost a quarter of the consultation responses called for support for onshore wind to be removed completely.
The political situation was exacerbated when Scottish first minister Alex Salmond announced that support for Scottish wind farms would only be cut by 10%. He strongly criticised the UK coalition government for the delay and warned that it would jeopardise future investment.
However, uncertainty has not been completely removed by Decc's announcement as the ROC level is only guaranteed for one year. If there is a significant change in the costs of electricity generation from onshore wind after that, the government can change the ROC level from April 2014. The government has not spelt out what it means by "significant", but it will ask for evidence on the cost of onshore wind this autumn.
Davey denied that this situation has created uncertainty for investors. Financial commitments will be protected for projects that have a permit, grid connection and turbine order in place before any new RO rate came into effect.
Maria McCaffery, chief executive of trade body RenewableUK, said: "We have been given clarity on funding for April 2013 to April 2014, but this is a relatively short timeframe. Investors need long-term certainty, and ideally we would have welcomed a little more of that in today's announcement."
Decc also announced increased support for gas generation, including a £500 million (€620 million) allowance to secure investment in gas fields and a new gas strategy in the autumn. This was rumoured to have been part of a deal between the Conservative Osborne and Liberal Democrat Davey to secure the ROC level for onshore wind. "This false debate between renewables and gas is complete nonsense — we need both," Davey insisted.
The government said it would examine how communities can have more of a say over, and receive greater benefit from, onshore wind farms. Davey refused to be drawn on details, but a document released with the announcement proposed that local businesses could be more involved in the supply chain or that developers could offset host communities' electricity bills.
John Wood, a partner at law firm Norton Rose, said: "There's quite a lot underlying the announcement that is not good news, so investors continue to face significant uncertainty."
The support for offshore wind will also be cut over time — remaining at 2 ROCs/MWh now, before dropping to 1.9 ROCs in 2015/16 and 1.8 ROCs in 2016/17. The government ruled out different levels of support based on a project's distance from shore or water depth, or a higher rate for floating turbines.
After 2017, the RO will be replaced by contracts for difference as part of a wider reform of the UK's electricity market, details of which are expected later this year.