Developers, manufacturers, investors and other renewable energy industry stakeholders need to know where the next big market is going to be so that they can adjust their business decisions accordingly.
Since 2003, global consultancy Ernst & Young has released its Country Attractiveness Indices, which ranks global renewable energy markets by analyzing investment strategies and resource availability. The indices are updated on a quarterly basis and the most recent report can be found here.
Here is the firm’s assessment of the U.K.
Clearing the EC Hurdle
The U.K.’s transition to a competitive auction mechanism that awards contract for difference (CfD) FITs received state aid clearance from the European Commission (EC) in late July, representing another milestone in the execution of the Government’s Electricity Market Reform (EMR). While this is welcome news for the market, it needs to be seen in context, i.e., just another small step in what appears to be an almost pedestrian transition under the U.K.’s EMR.
Pots of Cash
Notwithstanding, within days of this EC approval, a draft budget for October’s first CfD allocation round was released proposing £205 million (US$340 million) of support split between two categories; “established” technologies such as onshore wind and solar PV awarded contracts for project delivery beginning 2015-16 will receive £50 million (US$83 million) annually, while “less-established” technologies such as offshore wind, wave and tidal energy will be allocated £155 million (US$257 million) for projects beginning 2016-17. The draft budget also reinforced a decision in May to not allocate any subsidy support for coal to biomass conversion plants.
While the final budget won’t be announced until late September, it has already attracted criticism. While recognizing the need to hold back budget for future years, there’s also a sense that the allocation is overly cautious and falls short of what is required to drive down the cost of renewables in the long run. The U.K.’s Solar Trade Association (STA) has described the draft allocation as “absurd,” as even applying the whole “established” budget of £50 million (US$83 million) to solar PV would support only 1 GW of capacity, a considerable reduction given the market’s current growth potential.
The £155 million (US$257 million) allocation for “less established” technologies would also barely cover one small offshore wind project. These budgetary constraints are likely to further exasperate the stalling investment in new U.K. projects driven by the EMR stalemate. Some cynics may think this is a deliberate intension of the policy-makers.
Value for Money
The industry’s disappointment is likely to be all the more bitter after the UK National Audit Office (NAO) concluded that the Government has overpaid CfD subsidies to the five offshore wind and three biomass projects awarded early Final Investment Decisions in April. The NAO is “not convinced” that the decision to award £16.6 billion (US$28 billion) of contracts — equivalent to around 58 percent of the U.K.’s total available funding for renewables between 2015 and 2020 — is worth the risk to taxpayers, and claims that it may have undermined future bidding rounds by expediting contracts without ensuring sufficient price competition.
The threat of yet further policy upheaval also looms large as the Government considers offering CfD support to foreign renewables projects to aid the achievement of the UK’s 2020 target. While it has reassured the sector this will not occur before 2018, acknowledging that the challenges and complexities of such a change will require most aspects of the EMR policy design to be reviewed, even the prospect of further changes could be too much for an already fragile market fatigued by ongoing policy tinkering.
Nowhere has this been felt more recently than in the solar sector. Four of the UK’s largest solar companies have launched a legal challenge in response to the Government’s surprise announcement in May of its intension to withdraw Renewables Obligation (RO) support for solar projects above 5 MW two years earlier than planned, forcing them to compete for CfDs with other mature technologies. The challenge came just weeks after a coalition of more than 150 businesses petitioned the Government to give solar extra time and policy stability to compete with conventional fuels and avoid putting the U.K.’s current position in the booming global solar market at risk.
The U.K. has now become only the sixth nation to surpass the 5 GW installed capacity mark for solar PV, according to NPD Solarbuzz. Around 1.5 GW of new capacity has already been installed in the first half of 2014, more than the whole of 2013 and putting the U.K. on track to become the world’s fourth-largest market for new solar deployment this year. Martifer Solar, a Portuguese clean energy developer, plans to develop 100 MW of new capacity in the U.K. by early 2015, and a joint venture between China’s Znshine Solar and U.K.-based MAP Environmental has agreed a US$680 million deal to develop a 400-MW solar portfolio.
Large to Small
The Government’s unexpected solar intervention therefore comes despite record levels of public popularity and industry appetite. The rationale offered is the need to shift development toward commercial and domestic rooftops amid concerns that large-scale installations threaten to monopolize the RO budget, claims the STA say are ill-founded given solar currently accounts for just 5 percent of total RO expenditure.
Few in the sector are disputing the importance of the small- to mid-scale solar projects but point out that such projects still lack clear policy and incentive drivers to unlock their value.
Choppy Waters Ahead
The U.K. offshore sector is also continuing to experience mixed fortunes, with a mismatch between the potential 37-GW project pipeline and the Government’s target for 10 GW to 20 GW by 2020. The proposed CfD budget could reduce this ambition further, while the announcement in early August that Centrica and DONG Energy are abandoning the 4.2-GW Celtic Array in the Irish Sea is another blow to the sector. The developers have cited challenging seabed conditions that make the project economically unviable with current technology, though some are speculating that policy backsliding may also be a factor.
Project Pipeline Pickup
Projects are still flowing, however. Statoil and Statkraft are to proceed with the £1.5 billion (US$2.5 billion) Dudgeon wind farm after receiving CfD approval in April for the 402-MW project, and E.ON has received the green light for its proposed 700-MW Rampion wind farm with an estimated price tag of £2.0 billion (US$3.3 billion). JV partners ScottishPower Renewables and Vattenfall Wind Power have also recently received planning consent for the 1.2GW East Anglia One project, part of a wider 7.2-GW development granted under Round 3 of the Crown Estate’s offshore licensing program.
GIB Takes Offshore Private
But perhaps the biggest boost for the sector in recent months has been the unveiling of plans by the Green Investment Bank (GIB) to launch a £1.0 billion (US$1.7 billion) offshore wind fund to help utilities refinance operational wind farms and start new developments. It will be the first private capital under the control of the bank following receipt of EC state aid approval in May 2014 to promote and manage funds and other co-investment structures. The GIB will contribute up to 20 percent of the capital and is now seeking a suitable group of strategic long-term co-investors to participate in this “innovative capital-raising exercise.”
Lead image: United Kingdom map via Shutterstock