The UK renewable sector has seen firm growth over the last decade on the basis of decarbonisation of the electricity sector. Energy policy has become a political hot potato in 2016 and has slammed into the news on 24 June that the UK had voted to leave the European Union. The uncertainty is expected to cause project investors and banks to hesitate about committing new capital, and could cause a drop in renewable asset values. It is also not clear whether the European Investment Bank will remain the UK’s biggest clean energy lender.
New PM and new renewable focus?
May’s actions since her appointment as Prime Minister suggest a shift of energy policy focus from decarbonisation to affordability:
“…I want to see an energy policy that emphasises the reliability of supply and lower costs for users…”
She also merged the Department of Energy and Climate Change (DECC) with some elements of the Department of Business, Innovation and Skills (BIS). The result was the Department for Business, Energy and Industrial Strategy (BEIS), with secretary of state Greg Clark at the helm. The removal of climate change from the organisation’s title raised some eyebrows. But the combination of industry, climate change and energy issues under one roof could make a lot of sense, as it will enable one secretary of state to tackle questions that previously caused DECC and BIS to step on each other’s toes. One example would be reconciling high power prices, an export-led industrial strategy, the need to address climate change and the demands of energy-intensive industries
Renewable subsidy regimes
Renewable energy subsidy regimes, such as Contracts for Difference, have been formulated in order to comply with state aid rules. In theory, a “hard Brexit” could result in the UK being less constrained in its renewable support (or on the flip side, could expose UK companies to more competition from subsidised EU counterparts). However, post-Brexit agreement(s) with the EU are likely to involve some acceptance of state aid rules: Norway’s arrangements under the EEA Agreement and Switzerland’s Free Trade and sector specific agreements contain some commitment to state aid rules. Even the “default” option of WTO rules contains some regulation of subsidies.
EU Emissions Trading System
It is more than likely that the UK will remain in the EU ETS; it has been a stalwart supporter of the carbon market since its inception, continually pushing for more ambitious reforms and non-EU countries already participate in the scheme. Norway, Iceland and Lichtenstein have been members since 2008. However, uncertainty regarding the UK’s future in the EU ETS is likely to keep downward pressure on the carbon price, at least until a decision is made. Even if the country remains a member, it is unlikely that the UK will be able to influence EU legislative developments post Brexit. This will make it more difficult to drum up the support needed for ambitious EU ETS reform in the future. If, however, the UK is to leave the EU ETS, the end of the current trading phase (2013-20) would be the cleanest and most likely time for it to do so. The UK’s participation in the system through phase III is mandated by UK Greenhouse Gas Emissions Trading Scheme Regulations 2012, which would have to be nullified or amended if the country left the market earlier.
Wind in the doldrums
The prospects for new onshore wind and PV projects look sombre, with no mention of further CfD rounds. In addition, the Renewables Obligation is now effectively closed to new projects using these technologies, after the Energy Act finally became law on 12 May. As a result of these changes and reduced support under the feed-in tariff, there will be limited capacity additions for PV and onshore wind, at least over the next few years.
With regard to the feed-in tariff, the government has now turned attention to anaerobic digestion (AD) and micro-scale combined heat-and-power (microchip) projects. The aim of the consultation published on 26 May is to bring these technologies into line with the changes to support implemented last year. AD has been a victim of its own success, according to the consultation published on 26 May: by March 2016, some 250 installations had been deployed, amounting to 177MW. This compares with the government’s forecast in 2010 of 100 installations (160MW) by the end of the decade.
The biomass CHP sector was surprised by amendments to the Renewable Heat Incentive submitted to Parliament on 11 July, which came into force on 1 August. In essence, the changes reduce the support available for biomass combined heat & power plants that use less than 20% of their fuel for electricity production (and the rest for heat). In particular, if they fall below the 20% threshold, they can now only claim the higher tariff for a share of the heat produced. The sector has complained that there was no consultation and the amendments put over GBP 140m worth of investment at risk, according to the Renewable Energy Association.
The government intends to buy 52GW in December’s four-year-ahead (T-4) capacity auction for 2020/21 and a further 53.8GW in the early capacity auction in January 2017 for delivery in 2017/18. This was in line with the new strategy announced in March to ‘buy more capacity, buy it earlier’, as the 52GW is more than National Grid recommended (49.8GW). This may be partly driven by the risk that EDF may shut several of its coal plants early. On 28 July, and after a substantial delay, EDF made the final investment on Hinkley Point C – the 3.2GW nuclear power plant. A few hours later, the UK government made the surprise announcement that it would undertake a further review of the project and “make its decision in the early autumn”. It’s unlikely to cancel or delay the contract due to the political ramifications this would have with France and China. Instead, look towards possible plans to assure the UK Tax payer that costs will be capped and risks – at least on the surface – deferred. It’s hard to justify the the sums being injected into the project and whilst it’s our opinion that the money could be better spent on new CCGT, wind/solar and storage technologies, this seems to a fight to be taken up with the next proposed fleet.
The potential two year period (whenever it begins) for the UK to negotiate and effect its exit, means on-going uncertainty for the renewable energy sector. As the Brexit negotiations continue, the UK Government will need to show strong support for the sector, seeking to confirm participation in the IEM (or otherwise) and providing clarity around UK targets and the FiT and CfD support mechanisms, thereby preventing a hiatus in investment which would threaten the upward trajectory of renewable energy in the UK. Finally, the Brexit vote also raises issues around the UK’s constitutional make-up with the possibility of a second Scottish independence referendum and the implications for the renewable energy sector should Scotland, with its vocal support of renewables, vote for independence and pursue its own separate agenda.If you’ve found this blog helpful and would like other topics covered, please feel free to drop me an email with suggestions and subscribe to get the latest posts straight to your inbox