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UK ROC Review: DECC deals blow to investor confidence as it paves wave for more price cuts and a new dash-for-gas

Gail Rajgor

After a week of heavy criticism, the UK Government finally published its decision on prices for large-scale renewable energy and banding levels under the Renewables Obligation Certificates (ROC) system from April 2013 in England and Wales last week, but it did not ease industry fears.

In fact, while the announcement by the Department of Energy & Climate Change (DECC) was welcomed purely for the fact it was made and because it kept cuts to prices for onshore wind power to 10% only, the most likely outcome is that renewable energy investor confidence will hit a double dip recession in line with the UK economy.

As Richard Ceeney, Partner in the Energy & Natural Resources group at global law firm Reed Smith put it:

“This move could make the green energy sector further question this Government’s long-term green credentials – undermining confidence even more.”

He was talking about perhaps the most surprising part of DECC’s much anticipated, long overdue, statement on renewable energy support: the fact it used the occasion to make clear it is backing a new dash for gas to meet the UK’s future energy needs, while paving the way for further cuts in renewables support. It was a clear sign of DECC bowing to pressure from the Treasury.

Indeed, DECC announced a £500m field allowance for large shallow water gas fields “to secure investment in marginal gas fields” in the UK Continental Shelf. “Through the 2020s, and beyond if gas proves cheap, we expect it to continue to play a key role ensuring that we have sufficient capacity both to meet everyday demand and complementing an increasing amount of relatively intermittent and inflexible generation,” it said. “We do not expect the role of gas to be restricted to providing back up for renewables, and in the longer term we see an important role for gas with CCS”.

As Ceeney rightly says: “It is surprising the Government has chosen, in an announcement on renewables, to make a statement on the importance of gas power. The Energy White Paper outlined a concept for long-term gas power as a means of counteracting the inflexibility of nuclear and renewable energy provision; now, it is a major part of the Government’s energy policy in its own right.”

So what about renewables?

It was something of an insult to a renewables industry left in limbo for some time now while government infighting continued regarding what the level of support for the sector should be. It was bad enough that the Government had to be virtually shamed into finally making a statement – DECC’s announcement came within 48 hours of a frustrated Scottish Government proceeding with its own announcement, in which it challenged the UK Government to act.

When it finally did, not only did it wave the gas-banner, DECC ushered in the start of a possible biennial start-stop-start-stop cycle for project developers in the onshore wind and solar PV sectors. More frequent subsidy reviews, more traditionally associated with the US production tax credit funding system, are on the cards.

Under DECC’s plans, support for onshore wind from 2013-2017 will be reduced by 10% to 0.9ROCs, as consulted on in Autumn 2011. This level is “guaranteed until at least 2014 but could change after then if there is a significant change in generation costs”, DECC said. “A call for evidence on onshore wind industry costs will be launched this Autumn and report in early 2013.

"If the findings identify a significant change, the Government will initiate an immediate review of ROC levels with any new support arrangements taking effect from April 2014.”

There will be grandfathering and grace periods for projects already committed. The call for evidence, it added, will also consider how local communities can have more of a say over, and receive greater economic benefit from, hosting onshore wind farms. Meantime, support for offshore wind will reduce as the cost of the technology comes down during the decade.

Let down: Solar, AD and geothermal

For large-scale solar, the Government said there will be “no immediate reduction in support…but there will be a further consultation this year on reduced support levels given recent dramatic falls in costs”. Solar PV currently receives 2ROCs/MWh.

In addition, DECC announced plans to consult on removing FIT-eligible technologies under 5MW from the RO altogether, something Gaynor Hartnell, CEO of the Renewable Energy Association (REA), described as “very worrying”.

REA will “strongly oppose the proposal”, she said. While applying to onshore wind too, it will hit solar and anaerobic digestion projects most. It would be “financially illogical” to constrain solar PV to the FIT, which has a much smaller budget than the RO, says REA. “Many solar applications are already cheaper than other technologies but the expansion of cheaper solar would be constrained if this were to happen.”

Seb Berry, Head of Public Affairs for Solarcentury, was furious. "The last thing this industry needs is yet another consultation on support levels," he said.

"Ministers keep promising this industry "TLC" - transparency, longevity and certainty - but today's decision does the very opposite. The consultation response confirms that PV is already a more cost-effective technology than offshore wind and yet investors in the cheaper technology are now in limbo land awaiting yet another consultation and unable to commit to projects beyond March 2013."

The Government's proposal that the ROC level for large-scale PV should be slashed to that of the equivalent feed-in tariff rate from April 2013 suggests DECC is not serious about its 22 GWp ambition, he added. "The FIT rates for large-scale PV have delivered precisely zero installations in the whole of May and June and we see no prospect of the reduced FIT rate for large-scale PV being attractive to investors in 8 months time."

AD projects would also be affected. As REA points out, just one AD plant in the UK is over 5MW (out of the 22 currently supported by the RO). “If sub 5MW AD were to be removed from the RO it would be a disaster for the AD industry,” said REA Head of Biogas David Collins.

“Two ROCs is sufficient support for anaerobic digestion – but very few projects are or will be above the proposed 5MW threshold. On top of the new tough capacity restrictions for AD under the FITs we now face the prospect of the end of support under the RO.

"This totally contradicts Government aspirations for AD in Defra's AD Strategy and ensures that we will fail to achieve the targets for biogas under our National Renewable Energy Action Plan.”

Geothermal was also dealt a blow, with support set a 2ROCs/MWh. “We are effectively left with no deep geothermal power industry in the UK,” Hartnell said. “Whilst this is what the Government had originally proposed, geothermal developers had hoped for more, in order to kick start their pioneering projects. These projects will now only proceed if also in receipt of a grant.”

Deep geothermal power has the potential to supply 20% of the UK's electricity needs, according to REA, but is at the same level of maturity as wave and tidal and needed the same level of support. “It has strong synergies with the oil and gas sector and UK engineers were confident the UK could take a meaningful stake of the global industry expected to be worth $40 billion by 2020… 2 ROCs is insufficient to kick-start the UK industry.”

Some positives

The main positive news was for some marine and tidal energy technologies, with support raised to 5ROCs/MWh from 2ROCs for projects up to 30MW (bigger projects will get 2ROCs/MWh), in line with prices in Scotland. “REA did not support this somewhat arbitrary distinction, but Government felt there was a need to limit the potential amount of capacity which could be supported at 5ROCs/MWh, and this was the most workable solution.”

Hydro power projects, meanwhile, will see a 30% cut in financial support to 0.7ROCs, which is better than the 0.5ROC level previously proposed. Biomass also got a boost with a new band introduced to support existing coal plant converting to biomass fuels, while advanced gasification & pyrolysis (an advanced waste treatment technology) will get 2 ROCs, “a major win”, according to REA.

According to DECC, its proposals will bring forward 11TWh more renewable energy generation in 2016/17 per annum than current bandings, stimulating £20-25bn of new investment. As a result, by 2017 the UK could be generating 79TWh a year from renewables, which would put it three-quarters of the way towards meeting the 108TWh electricity component of its 2020 renewable energy target.

“The support we are setting out will unlock investment decisions, help ensure that rapid growth in renewable energy continues and shows the key role of renewables for our energy security,” claimed Ed Davey, Secretary of State for Energy and Climate Change. However, industry commentators are not so sure.

No clarity, no confidence

“The Government’s decision to support renewable energy is encouraging but there needs to be greater confidence that this will stick and that there is not more politicking going on behind the scenes,” Adrian Reed, head of energy, waste and renewables at international investment bank Altium told Renewable Energy Focus. “What is essential is that the renewables industry has clarity and can plan. Regulation needs to be clear, consistent and dependable – whatever it is, after that the market can do its work and projects may, or may not, get funded based on their fundamentals.”

He added: “There is a clear desire for utilities, EPC, construction, installers, generation technology developers, manufacturers and funders to invest in this industry. The only thing hampering this is regulatory uncertainty from the Government so we need clear unequivocal guidance which we can rely on.”

Ceeney agreed. With “the uncertainty which the Government has injected into the sector by proposing a further review and potential cuts to subsidies in 2014, the outlook for the UK onshore wind market could be better”, he said.

“The green energy sector desperately needs stability and a pipeline of major wind projects. A review into subsidy arrangements every two years damages confidence, as most wind projects take far in excess of 18 months from conception to completion. It is therefore of little comfort to wind energy companies and investors to know that the goal posts could move again in 2014, when subsidies are likely to be further reduced.”

The offshore wind market may pick up the slack, reinforced by the positive news that the Government's support for offshore wind holds firm, “but it is not yet clear whether, or when, it will be able to do so”, Ceeney added. He also suggested that while the 10% cut to subsidies for onshore wind farms is the best result the sector could have expected, “it will still hurt”.

The market, he pointed out, is already suffering, with finance difficult to raise and the German offshore market competing for capital investment. “The result in the industry is that profit margins are already being squeezed and capital expenditure is being cut.”

RenewableUK, the trade association representing the wind industry in the UK, said the 10% cut will reduce the growth of the onshore sector by an estimated £2 billion of investment out of a potential £20 billion, with 1,300 fewer jobs created. The association’s CEO Maria McCaffery said she was pleased that DECC’s final decision on onshore wind support “was not derailed by short term political considerations”, but she stressed “the review must not be allowed to create a mood of uncertainty among investors”

Martin Wright, REA Chairman, suggested DECC’s announcement is, however, “likely to inhibit investment”. Expressing concern about the further reviews facing many technologies, he said:

“Companies will not invest without stable Government policy delivered in a timely manner. At such a critical time for the economy, this country cannot afford any further political wrangling that puts at risk future investment and job creation.”

Niall Stuart, Chief Executive of Scottish Renewables concurred: “The announcement that government is launching a further review of support for onshore wind later this year only creates further uncertainty and makes it difficult for the industry to plan ahead, though we are pleased that the decision on any changes in 2014 will be based on evidence rather than political views.”

Firms in the hydro sector will also have to reconsider some major investments, he said. “Feedback from the industry suggests a number of planned schemes may not go ahead unless the Scottish Government increases the levels of support for hydro in Scotland in its own Banding Review.”

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