United Kingdom

United Kingdom

Question of the Week: Confidence in CfD support?

UK: Last month, ScottishPower said it could cancel the East Anglia One project if it failed to win a Contract for Difference (CfD) from the UK government.

Dong's Walney extension was one of five offshore projects to receive an early CfD contract
Dong's Walney extension was one of five offshore projects to receive an early CfD contract

Has this announcement damaged the industry's confidence in the subsidy scheme? Windpower Monthly speaks to consultant Charles Ogilvie, Scottish Renewables' Lindsay Leask, RenewableUK's Gordon Edge and Poyry's Management Consulting's Richard Slark.

Question: How confident is the industry in the CfD scheme?

Charles Ogilvie, former chief of staff to former energy minister Greg Barker, and supply chain consultant

Some optimists in the offshore wind sector have spun that the gradual attrition of projects in the latest round of offshore wind as the healthy by-product of a competitive system functioning well at picking winners.

However, with ScottishPower Renewables now sounding a warning bell over their East Anglia One project, it is hard not to feel that such cruel-to-be-kind market mindedness is a post-hoc narrative woven by those paid to be positive about the sector.

The reality is that large infrastructure in this country has always been taken forward in partnership with government, as there was a clear understanding that the huge costs risked in development would scare off investors and in fact render such processes less, not more efficient.

It is hard not to feel sorry for the offshore wind developers as the balance of risk has shifted beneath their feet over the past five years. Gambling on license awards, then on planning and then subsidy levels, developers have woken up in 2014 now having to gamble on getting support full stop.

It is easy to see how cash strapped European utility companies who committed to this sector with investments in UK teams and joint ventures. Not to mention direct costs in developing sites, would now feel led up the garden path and be finding 'technical challenges' and such to cover beating a dignified retreat.

What goes around comes around and the huge waste of money poured into developing projects that will never be, the loss of confidence in the UK government to partner intelligently and economically effectively with industry, will cost the economy far more than any short term costs benefits squeezed out by the pseudo-competitive CfD process for offshore wind.

Lindsay Leask, senior policy manager for offshore renewables, Scottish Renewables

The UK has long been one of the most highly-rated international markets for renewables. Our wind, hydro and marine energy resources are – rightly – the envy of Europe.

In recent years, however, the uncertainty caused by the Electricity Market Reform (EMR) process, which dictates how electricity will be priced, has pushed the country down competitiveness league tables.

Offshore wind developments are huge infrastructure projects with investment lead times of several years. A stable framework which provides certainty and clarity over the long term is therefore absolutely crucial to the sector's success.

Without a CfD offshore wind projects simply cannot proceed.

The budget for the first allocation round of CfDs was far lower than anyone in the sector had anticipated, has clearly impacted the confidence of existing and potential investors in the sector.

But the CfD process, by its very design, is always going to be one which creates winners and losers: it is intentionally designed to create a competitive process for allocation of state support.

We have raised our concerns over this funding issue with DECC through a variety of forums and clearly set out what the industry now needs through documents such as Building Britain's Renewables Future, our priorities for Government 2015-2020.

Without the certainty investors need to inject vital cash, offshore wind projects will fail. This isn't hyperbole – it's fact, and the sooner DECC give the sector early indication of the next budget for the allocation of Contracts for Difference and of the Levy Control Framework beyond 2021, the better.

Gordon Edge, director of policy, RenewableUK

We're disappointed by the Government's overly cautious approach in the first allocation round of CfD, as it risks being insufficient to drive industrialisation, competition and cost reduction.

The Government has to give more visibility about the way forward. The budget for future CfD allocation rounds must allow more and bigger projects that can be built out into the 2020s. This kind of visibility, plus a much clearer picture of the opportunity out to 2030, will allow the UK to make the most of being first mover in offshore wind.

We already have an enormous opportunity: if you add up everything being developed and constructed the UK has over 33GW coming in the pipeline; that's hugely impressive by anyone's standards. With the right policy support we can turn that opportunity to economic success for the UK.

We're already seeing that supply chain building, with companies such as JDR Cables, Tekmar, Siemens T&D, and Sembmarine SLP winning orders, as well as the development of Able Marine Energy Park and Siemens commitment to Hull.

Being clear that the UK will remain number one in offshore is the best way of securing even more investment in the UK industry.

Richard Slark, head of renewables, Poyry Management Consulting

Issuing idle threats to governments is unlikely to be an effective lobbying position – but was that what ScottishPower were doing last week? I think not. Keith Anderson was simply stating commercial reality: offshore wind developers that are unsuccessful in the auctions for CfD support are unlikely to continue to develop those projects (nor any subsequent, related projects in the same development zone).

Developers have each invested tens of millions pounds over the last six years getting their proposed Round 3 projects to a position where they are eligible to bid for support, only to now find that the government has not allocated enough money to fund a single project the size of East Anglia One in this first CfD auction round.

Nor can these developers be blamed for the size of these projects. The offshore wind industry is being driven to cuts costs to £100/MWh by 2020, but that cost reduction pathway was predicated on a predictable and enduring roll out of large-scale projects. The visibility of that pathway has all but evaporated. Not only is the present allocation round too small to drive that reduction in costs, but the uncertainty over the size of future allocation rounds removes the foresight required to encourage inward investment into the UK to develop a cost effective supply chain.

Faced with the Government's reduced support for the sector, many developers and equipment suppliers will indeed call time on their investments. Not out of idle threat, but because it is economically rational for them to redeploy their capital to markets where there is less political risk and uncertainty, and where they can expect a more assured return on their investment.

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