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British budget boost sparks immediate offshore action -- Denmark's Dong Energy first to announce project go-ahead to delighted wind industry

Some £10 billion ($14.7 billion) of "shovel-ready" wind power projects are set to proceed in the United Kingdom thanks to a package of measures in the government's latest national budget that will catalyse investment in the wind power sector, says the British Wind Energy Association (BWEA). The short-term measures are in good part what the wind industry asked for to compensate for the low value of the pound and the current squeeze on availability of project finance that has stymied offshore wind development.

Chancellor Alistair Darling announced £525 million of additional financial support for offshore wind over the next two years, funded through an increase in renewables obligation certificates (ROCs). Projects that reach financial close from 2009-10 will receive two ROCs per megawatt hour -- up from 1.5 at present. The allocation of ROCs will reduce slightly to 1.75 for each megawatt hour in 2010-11, before reverting to 1.5 ROCs. Project owners cash in the ROCs to supplement revenues from sales of the physical electricity by selling them to electricity retailers. Legislation known as the Renewables Obligation (RO) requires retailers to submit ROCs each year to demonstrate they are acquiring a rising volume of electricity from renewables sources, or to "buy out" of the obligation.

"The RO rewards renewables producers with funding from those energy suppliers that choose to source their power from cheaper but higher-emitting fossil fuel generation. It is not a government subsidy, rather a Robin Hood-style redistribution mechanism taking money from the dirty to pay the clean," is how Nick Luff, group finance director at major utility Centrica, describes the system.

Overall, the improved market structure for offshore wind development could release £9 billion of investment in over 3 GW of wind projects that are consented and ready to go. These include the 1000 MW London Array wind farm, which the government would dearly like to see operational in time for the 2012 Olympics. Other big projects to benefit will be Centrica's 250 MW Lincs project off Lincolnshire and RWE npower renewables' 750 MW Gwynt y Mor project off north Wales.

Line of credit

The government has also arranged £4 billion of new capital for renewable and other energy projects from the European Investment Bank (EIB). This is aimed at the smaller independent developers who are struggling to finance their projects due to the collapse in bank lending, rather than at the utilities who are still able to finance wind projects off their strong balance sheets. The EIB line of credit could allow 1 GW of non-utility projects to proceed, which have already been given consent.

The budget also allocated £405 million to support low carbon technologies -- such as offshore wind and other marine renewables technologies including tidal and wave power -- through the development phase. The new funding comes via existing grant programs to help manufacturers take their projects from prototype to the commercial stage. Renewables will also gain from an across-the-board increase in capital allowances to 40% for one year. This allows a higher proportion of investments to be set against taxable profits.

In a budget noted for its overall austerity, the measures are part of a £1.4 billion package to create a low carbon economy and include introducing what Darling says is the world's first carbon budget -- a legally binding 34% reduction in UK emissions by 2020. Energy efficiency, small-scale low carbon energy, combined heat and power (CHP) projects and development of carbon capture and storage at fossil fuel power stations also benefit.

The measures, which are what the BWEA called for in a pre-budget submission to the Treasury, have been warmly welcomed by the wind industry. Referring to the £10 billion pipeline of ready-to-construct wind and marine renewables projects that are being held up by current economic conditions, BWEA chairman Adam Bruce says the package deals with the short-term economic hurdles they face. "It also restates the government's long-term commitment to the renewable energy sector," he says.

Other green groups are less enthusiastic. Philip Wolfe of the Renewable Energy Association commends the budget's "green lining," commenting that the measures should prevent further contraction of the renewables industry. But the UK is still failing the "Stern test," he says, referring to Lord Stern's call for 20% of stimulus packages to be devoted to green investment. "We are allocating substantially less to sustainable energy during the global downturn than other countries and this will leave our world-class renewables businesses at a competitive disadvantage. The additional £405 million support for the low carbon industrial strategy may help bridge this gap, but there are so few details it is hard to know."

Less risk for investors

Robin Cohen, a Partner in Deloitte's Economic Consulting Practice, says that the increase in ROCS for offshore wind should have the most impact for marginal projects. "The current estimates of the costs of building offshore wind to meet the government's renewable energy targets for 2020 are in the order of £70-90 billion," he says. The British renewables market is competing for investors against markets that offer a premium price for electricity from renewables projects for a fixed 20-year period for all projects, he points out. The extra £525 million to projects reaching financial close between now and 2011 is significant in terms of countering some of the advantages of lower risk markets elsewhere, adds Cohen. The success of UK offshore wind, however, will depend on the recovery of the economy, "and in particular recovery of the carbon price and the willingness of investors to put up funding for these projects," he says.

Others are more confident that the government's measure are sufficient on their own. On the back of the budget provisions, Denmark's Dong Energy immediately stated its intention to proceed with the second, 60-turbine phase of its Walney offshore wind farm in the Irish Sea. The two phases are expected to cost DKK 9.7 billion (£1.2 billion) and will have a combined capacity of 367 MW. The Siemens turbines to be installed at Walney are the first part of a contract it has with Dong to supply up to 500 turbines for offshore projects. "It's encouraging that the investment regime has now been created to allow us to implement our strategy of considerably expanding Dong Energy's position within sustainable energy," says Dong's CEO Anders Eldrup. Allocation of two ROCs per megawatt-hour means the utility will begin construction of Walney I and II.

As for the prestigious London Array project in which Dong is one of the partners, the consortium will now conclude its review of the equipment supply tenders before making an announcement on the final investment decision, the company says. "With two ROCs, Dong Energy finds that a good foundation has been created to go along with the London Array project as well. We will now discuss this with our partners," comments Eldrup.

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