The UK’s draft Energy Bill, the ROC banding review and the news that gas is higher up the Government’s agenda than previously thought indicates much is in motion, but the direction and the details remain murky.
This quarter saw significant policy activity in the UK, from the release of the draft Energy Bill and the ROC banding review to the shock news that gas is higher up the Government’s agenda than previously thought. The lack of clarity and detail across the various policy announcements, and the ambiguous messages coming out of the Treasury and the Department of Energy and Climate Change (DECC), have been frustrating for the renewable sector. The ongoing uncertainty risks delaying the development of the sector, and in particular, the achievement of the UK’s 2020 target.
Policy announcements leave RES sector in limbo
|Ranking ||Issue 34 || Issue 33 |
|All renewables index ||5 ||6 |
|Wind Index ||3 ||5 |
|Solar Index ||20 ||19 |
Source: EY analysis
Draft Energy Bill
The draft Energy Bill released in May represents the legislation that will support the Government’s Electricity Market Reform package. The bill includes provision for the new “contract for difference” FIT scheme to replace the current ROC banding scheme, and a capacity market to ensure adequate back-up power for renewables.
However, the bill has been criticized for containing few decisions on the new FIT and being light on detail with no concrete plans set out. The omissions have concerned some industry players and the bill has done little to dispel the fear that its provisions, including the proposed carbon floor price, could prompt a “dash for gas” by favoring gas and nuclear over renewables.
One of the most obvious omissions from the draft bill was a binding commitment to decarbonize the UK’s electricity supply by 2030 in line with the Committee on Climate Change’s recommendations. It has, over recent months, become much more likely that the Government, driven by Chancellor George Osborne, is planning to establish the UK as a “gas hub” and will prioritize decarbonization of the energy sector “in the 2030s,” a decade later than planned.
This has caused concern throughout the clean energy sector, that the Government’s new carbon goals will come at the expense of commitment and long-term investment in renewable energy.
ROC banding review
Other significant policy announcements this quarter covered the results of the ROC banding review undertaken by DECC. Support for onshore wind will be reduced by 10% from 1 April 2013 to 0.9ROCS/MWh for the period of 2013 to 17 as expected, despite a call by the Chancellor for a 25% cut. However, the announcement included a provision to review onshore wind costs later this year, allowing the possibility of additional cuts in 2014. Offshore wind retains 2ROCs/MWh until April 2015, when support will be cut by 5%, with a further reduction in the following year.
A series of tariffs for different levels of biomass co-firing has been introduced, ranging between 0.3ROCs/MWh and 0.9ROCs/MWh. The support level for conversion of coal-fired plants to biomass was confirmed at 1ROC/MWh, while dedicated biomass plants will continue to receive 1.5 ROCs/MWh until 31 March 2016, before falling to 1.4ROCs/MWh thereafter.
Wave and tidal projects received a boost from the increase of support from 2ROCs/MWh to 5ROCs/MWh, subject to a 30MW limit. There was no change to the support offered to large-scale solar projects, but a further consultation later this year is planned to determine the reduced level of support of the technology which, the Government says, should be at a much lower level consistent with FITs for small-scale solar projects. Investors have indicated that this further delay for a decision on solar support continues to leave them in limbo and unable to commit to projects beyond March 2013. Q2 did see some clarification of support for small-scale solar projects, ending months of uncertainty.
The new rate of £0.16 (€0.20)/kWh (down from £0.21 (€0.26)/kWh took effect on 1 August and will be available for a 20-year period instead of a 25-year period. A degression mechanism will reduce support, depending on the capacity installed in previous periods. At the same time, DECC almost halved its forecast for the industry to deliver 22GW by 2020 and now expects to reach 11.9GW by 2020. Changes to FITs for small-scale wind, hydro and biomass plants will take effect from 1 December 2012.
In other news, there were positive developments for the UK’s offshore wind sector this quarter. The Government gave approval to 1.1GW of capacity, giving a boost to the country’s offshore wind pipeline. DECC gave the go-ahead to Centrica’s 580MW Race Bank project and Warwick Energy’s £1.5b (€1.88b) 560MW Dudgeon development. In mid-July, Centrica and Dong submitted initial proposals for a giant 2.2GW offshore wind farm in the Irish Sea between Anglesey and the Isle of Man.
In a bid to identify and overcome barriers to offshore wind development, the government’s Offshore Wind Cost Reduction Task Force has set out a number of key actions and specific recommendations that must be implemented to try to cut the cost of generating electricity in the sector to £100 (€125)/MWh by 2020 from around £140 (€176)/MWh today.
However, these positive developments were partially offset by the announcement that Danish wind turbine manufacturer, Vestas has canceled plans to build a factory in the UK to produce its 7MW offshore turbines, leading to speculation that foreign investors remain skeptical about the Government’s commitment to the offshore wind sector.
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