A key part of the reform will introduce a new support system for renewables.
The new incentive system is aimed at promoting growth in low-carbon energy. Under the system, known as contracts for difference (CfD), 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, although generators will be able to choose between the current system of the renewable obligation (RO) and the CfD until 2017.
The industry is still waiting for clarification on key parts of the legislation, including how the strike price will be set and what the transitional arrangements between the RO and the CfD will be.
"We're rapidly getting close to 2014, we're not sure how the transition is going to work, we're not sure how the market mechanism is going to work, we don't know what level of support we're going to get and we don't know how we can monetise these support mechanisms even if they're sufficient because of lack of liquidity in the market," says Gordon MacDougall, chief operating officer of developer RES in the UK and Ireland.
The reform has faced significant delays due to political infighting, particularly over onshore wind. The official line of the coalition Conservative-Liberal Democrat government is to support wind and renewables, but several high-profile Conservative ministers have argued against more onshore wind, including the chancellor George Osborne and energy junior minister John Hayes.
Liberal Democrat energy minister Ed Davey supports wind and last year protected the industry from a possible 25% cut in the RO motivated by Osborne. The RO will instead be reduced by 10% to 0.9 Renewable Obligation Certificates (ROCs) per MWh from April.
However, it was only a partial victory as a further review of the RO level was announced at the same time. The government says that 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.
Last year, the UK installed 1.19GW of onshore wind. Despite the political infighting, there was an improvement in permitting approvals, bucking the trend of the past few years of worsening performance. Approval rates for onshore wind farms below 50MW, which are decided at a local level, increased by 15% from 2011 levels. But several Conservative councils have proposed minimum separation distances between homes and wind farms, despite this being against national policy. The industry is awaiting the outcome of a judicial review by developer RWE against Milton Keynes council, in the south of England, on this issue.
The Scottish industry has also been under heavy criticism from the Conservative Party. Last year, some Scottish politicians called for a temporary moratorium on wind farm applications, complaining that councils were being swamped. But the Scottish government, which is a staunch supporter of renewables, refused these requests. It launched a £673,000 (EUR fund at the end of last year to help councils cope with the volume and detail of applications for renewable energy.
Meanwhile, in Northern Ireland, the industry is facing a race against time to upgrade its grid. Around 600MW of wind projects have consent, but construction will not start until grid connection is possible. Some of the project consents will reach their five-year expiry date this year.
The UK offshore wind sector is also being affected by the lack of clarity over electricity market reform. The strike price and mechanism for CfDs will be particularly important for Round 2 projects that may not come into operation under the ROC regime, including utility RWE's 1.2GW Triton Knoll, utility Centrica's 580MW Race Bank and developer Statoil and Statkraft's 560MW Dudgeon, all off England's east coast in the North Sea - and for the majority of Round 3 projects which are scheduled to come online around 2020.
Risk of delay
Chris Morgan, chief executive of developer RES offshore, says that the uncertainty risks delaying projects. Under the ROC regime, developers could take decisions to carry out expensive pre-construction work in parallel with securing project consents.
"EMR uncertainty risks putting the consenting and pre-construction activities back on to a sequential path and so project construction and delivery dates may therefore be delayed," he says.
In any case, offshore developers are facing cuts in the ROCs. For agreements signed between now and 2014/15, projects will receive 2 ROCs/MWh as a top-up in addition to the price at which they sell their electricity. In 2015/16, support will fall to 1.9 ROCs/MWh and in 2016/17 it will drop to 1.8 ROCs/MWh. However, this is more generous than the 1.5 ROCs/MWh that had been proposed by the Department of Energy and Climate Change (Decc) for 2014/15 onward.
The sector is under pressure from the government to cut costs from £150/MWh to £100/MWh by 2020. Offshore wind developers, turbine manufacturers and component suppliers are among the companies that will be represented on the UK government's new offshore wind programme board, which aims to guide the industry toward substantial cost reductions. The board is co-chaired by Adam Bruce, head of corporate affairs at developer Mainstream Renewable Power, and Hannah Brown, head of industry and investment in the Decc's office of renewable energy deployment.
Despite these uncertainties, the year ahead is set to be a productive one, with an additional 1.28GW predicted to be installed by the end of the year, including the 630MW first phase of London Array wind farm in the outer Thames Estuary, as well as more than half of the 504MW Greater Gabbard project off the coast of Suffolk in the East of England.
The UK is still leading Europe in terms of installed capacity offshore. Last year it installed 1.15GW, which was around 73% of that installed in the whole of Europe. The total UK offshore wind capacity is now 2.68GW. While this met expectations for 2012, it falls short of what is needed in order to reach the UK's 2020 renewable energy targets. The pace of installation will need to increase to an average of 1.5GW a year to reach the 2020 target of 15GW.
Permitting is also an issue for offshore wind. Medic welcomes the fact that the government Department for Environment, Food and Rural Affairs has set up a unit to resolve issues relating to EU regulations on habitats and birds before applications are submitted.
Medic adds: "Finally, we are seeing a number of initiatives promoting co-existence and working to integrate offshore wind within a wider framework of industries operating in the marine environment. It is a sign that offshore wind is coming of age!"