Investment in renewables may get hit despite rise in wind farm subsidies 

Subsidies for wind farms, added to the bills of energy consumers, will rise by nearly 10% from next year under the government’s reforms of the electricity market. But uncertainties under the new regime, detailed on Thursday, may mean renewable energy companies still find it impossible to invest.

The government has not reached a deal with the nuclear operator EDF on what level of support it should receive from energy bill payers for new reactors, but ministers promised a loan guarantee programme that could be worth £10bn.

Wind turbine operators and manufacturers have been holding off on tens of billions of pounds of investment in the UK, over fears that subsidies would be cut to unsustainable levels.

The draft subsidy level – the “strike price” – will be £155 per megawatt hour for offshore wind farms from 2014, falling to £135 in 2018. For onshore wind farms, which are cheaper to build and run, it will be £100 falling to £95 in 2018.

That compares with prices of about £90 per mwh for onshore under the current subsidy system, and about £130 for offshore wind, under the current Renewables Obligation, which runs to 2017.

Ed Davey, secretary for energy and climate change, said the new regime would help ease customer energy bills – despite the subsidies being levied from them – and save households £5bn by 2030 by reducing the UK’s reliance on imported fossil fuel energy, which has reached a record high according to figures released this week.

But the new “contracts for difference” will run for only 15 years, compared with 20 years under the old system, and this will reduce investor certainty and their appetite for pouring billions into the UK’s green economy, renewables experts warned.

Maria McCaffery, chief executive of RenewableUK, which represents wind companies, said: “The levels of the strike prices are challenging but possible considering the reduced time periods that renewables will be supported for under contract for difference system compared to the Renewable Obligation. However, more details need to be set out. The most important ingredient remains investor confidence and that will take time to land. The secret is consistent long term support and investors seeing that government is behind renewables and low carbon generation for the long term.”

Wind farm companies had feared that anti-renewables rhetoric from senior figures in the coalition and vociferous opposition to wind farms from sections of the media would encourage the coalition to cut subsidies to a level where the construction of new turbines was no longer viable.

Privately, wind farm operators said they were unsure of the full impacts of the new subsidy regime, and were waiting for further information from government before they could make a judgement on new investments.

The strike price is the minimum price that can be paid for a unit of electricity generation. If the wholesale electricity price is below the strike price, companies generating low-carbon power have an economic advantage over fossil fuels, which should encourage more renewable and nuclear generation. If the wholesale price rises above the strike price, however, any surplus subsidies can be clawed back by the government.

Ronan O’Regan, director at PwC, said: “The strike price headlined on offshore wind sounds reasonable but it depends on how it reduces over time and it is difficult to compare directly with what projects get with the Renewable Obligation. Existing investors in offshore wind will broadly welcome the draft prices. But questions remain whether this on its own will be enough to attract the new financial investors that the sector requires.”

He added: “Capital is internationally mobile but constrained, because investors will assess opportunities across multiple markets and sectors. The UK needs to convince investors that its market is both attractive and offers a stable regulatory environment.”

Investors may be spooked by the fact that although between 2012 and 2020 renewable electricity capacity in the UK is projected to grow by 30GW, between 2020 and 2030 the projected growth is only 8GW, giving poorer long term prospects. O’Regan said: “Manufacturers and suppliers currently considering investing in facilities in the UK will only do so if they are able to achieve reasonably long-term levels of visibility on future orders.”

Another major issue troubling renewable energy investors is that the government is firmly opposing a proposed EU-wide target on renewable energy generation for 2030. Clean energy experts say this would spell disaster for investment, because the certainty provided by the current EU target – of generating 20% of energy from renewable sources by 2020 – has been key to spurring the development of alternative energy, which in turn has brought down costs and made low-carbon electricity more competitive with fossil fuels.

Separately, the government’s energy bill is facing a challenge in the Lords. Lord Oxburgh has tabled an amendment that would resurrect a target, narrowly defeated in the Commons, to decarbonise the electricity sector by 2030.