Renewable electricity projects in the U.K will compete for £300 million ($484 million) in subsidy support this autumn, which is an increase of £95 million from the indicative budget published in July, U.K Energy and Climate Change Secretary Ed Davey announced on Thursday.
The U.K has decided to move away from its current Renewables Obligation Certificates (ROC) scheme for supporting renewable energy projects towards the so-called Contracts for Difference (CfD) subsidy program.
CfDs, which will go into effect in April 2015, will pay a variable top-up between the market price and a fixed price level, known as the "strike price." If the strike price is lower than the wholesale market price, generators will be asked to return the difference.
The policy for establishing a capacity market and the CfD subsidy scheme are the cornerstone of the U.K. government’s effort to reform the electricity markets in order to drive investment in a new generation of clean, secure electricity supplies in a cheaper manner than through previous policies.
Increased budget to be split between different technologies
However, renewable energy investors should be aware of the U.K government bearing new gifts. The increased budget will be split between the various renewable energy technologies bidding for subsidy support.
Thus, according to Thursday’s announcement from the country’s Department for Energy and Climate Change (DECC), established technologies, such as onshore wind and solar, will compete for up to £65 million in support, while less established technologies, such as offshore wind and marine, will share in up to £235 million.
Today’s increase in subsidy support for renewable power projects does not constitute a change in the government’s stance towards financing the sector. "The Government is able to increase the CFD budget because the latest estimates of the overall costs of other policies, in particular the Renewables Obligation, are lower than expected," the DECC said.
Therefore, the projected spend of the budget remains within the Levy Control Framework, which means total subsidy to the sector is capped.
Commenting on Thursday’s announcement concerning the finalized budget for CfDs, the U.K’s Solar Trade Association (STA) suggests this is rather a conflicting case.
"DECC claims it is moving solar out of the Renewables Obligation (RO) two years early because of pressures on the RO budget, but the announcement today reveals the cost of the RO had been lower than expected, and DECC’s latest figures show solar power took just 1.3% of the RO budget in 2013/14," STA says.
STA Chief Executive Paul Barwell said, "Today’s decisions represent serious strategic mistakes in energy policy that are not supported by the facts and fly in the face of the urgent need for cost-effective action on climate change."
Who will invest?
Barwell argues that given solar power has gone from near zero contribution at the start of this government to providing 9.4% of renewable power in the second quarter of 2014, removing solar from the Renewables Obligation constitutes an unfair and unjustified discrimination.
The STA suggests that plenty of developers "have already decided that the financial risk due to the ‘cliff edge’ of zero ROCs from April is far too high" and have withdrawn investment plans.
The STA points out that "generally the structure of the CfDs favors large players in the industry who can shoulder large risks, while the U.K. solar industry is dominated by new entrants and SMEs that are less able to cope with risk and uncertainty."
Therefore, CfD budget and design "favour large, established companies over young, disruptive solar start-ups," the association adds.
There is a clear danger, Barwell says, that the CfD policy will remove rather than increase competition in the energy sector.
Barwell’s argument appears to be in line with that of Jamie Richards, partner and head of Infrastructure at the U.K.’s Foresight Group, who said "the new CfD scheme will tend to favor larger scale assets, where economies of scale will apply."
Foresight’s Foresight Solar Fund Limited (FSFL) announced recently it will seek new funds to acquire new solar PV assets in the U.K.. The fund has only invested in ROC accredited projects to date.
"Because the company is the largest solar focused investment company with gross assets of some £250 million, it will be well-placed to bid and acquire such assets as they become available," Richards told pv magazine.