Is the UK's renewable energy sector a victim of its own success?

By Martin Morris, CA magazine

11 May 2016

We ‘subsidise’ renewables and ‘invest’ in oil and gas, don’t we? It’s not just the semantics around power generation that can be tricky to translate, with the UK’s energy sector directly affected by how the political and economic winds blow, reports Martin Morris.

Is the UK’s renewable energy sector a victim of its own success? At one level the numbers tell a positive story, with the latest figures (Q3 2015) from the Department of Energy & Climate Change (DECC) showing renewables’ share of electricity generation hitting 23.5%, up 5.9% on Q3 2014.

Total renewable electricity generation was 17.8 TWh (terawatt-hours), an increase of 33% year-on-year, although 18% down on the Q1 2015 peak of 21.7 TWh (to put it in context, one terawatt hour represents a year’s supply of energy for nearly 240,000 homes).

Onshore wind generation rose by 30 % to 3.8 TWh, while its offshore wind counterpart increased by 52%, from 2.2 TWh to 3.4 TWh.

Most significant of all, solar PV (photovoltaic) generation rose by 73% to 2.7 TWh, due to increased capacity.

This meant renewable electricity capacity overall amounted to 29.7 GW, up 26% on a year earlier, with significant growth in biomass capacity in addition to the growth in solar PV.

Tellingly, 4.2 GW of capacity installed qualified under the feed-in tariffs (FiT) scheme. This represents an increase of 28% on 2014, constituting approximately 14% of all renewable installed capacity at present.

Unsurprisingly, given the declining cost of the technology involved, solar photovoltaics (PVs) represent the majority of both installations and installed capacity on FiTs with, respectively, 99% and 83% – the majority of PV installations being very small (sub-4 kW) domestic rooftop systems.

Solar panel installation

Impact of the oil slump

Needing to be factored into the renewables equation, however, has been the ongoing drop in wholesale electricity prices, prompted by the fall in the price of crude oil.

As Ronan O’Regan, PwC’s Renewables and Clean Tech Leader points out, low oil prices have started to flow through to gas and power prices, which have had significant reductions across Europe over the past 12 months.

He adds: “The impact that falling power prices have on renewable energy developers varies depending on what type of subsidy arrangement they are on.

“For projects with fixed FiTs there is no impact. However for projects under the RO (renewables obligation) scheme in the UK, falling power prices will hit revenues as the power price can represent up to 50% of a project’s revenues.”

But with the UK Treasury demanding further substantial cuts in public spending in order to plug the nation’s budget deficit, the renewables sector in general – and the solar industry in particular – have been coming under increasing pressure regarding the disbursement of subsidies, such as FiTs.

How much UK energy is green?

  • Wind: 9.5% (onshore 5%, offshore 4.5%)
  • Bioenergy: 9.1%
  • Solar PV: 3.5%
  • Hydro: 1.4%

Source: DECC

Alongside the government’s November 2015 Autumn Statement, the Secretary of State for Energy and Climate Change, Amber Rudd, unveiled what amounted to an energy policy reset.

She said: “We have to get the balance right and I am clear that subsidies should be temporary, not part of a permanent business model. When the cost of technologies comes down, so should the consumer-funded support.”

Consequently, the government has retreated from helping small to medium-scale onshore wind and solar technologies, taking the view that the subsidies have done their job.

Indeed, in December 2015 Amber confirmed low-carbon energy accounted for a record 39% of electricity generation in 2014.

If the government are serious about their national and international commitments they need to back up the empty rhetoric with real actions.

With total installed solar capacity forecast to climb 50% to 12 GW by the end of the decade, the decision to cut the tariff for domestic-scale solar (up to 10 kW in capacity), such as rooftop solar photovoltaic (PV) installations, to 4.39p p/kWh (per kilowatt hour) – this in stark contrast to the old regime where solar power up to 4kW in capacity was paid at 12.47p p/kWh and for 4-50kW, 11.30p – came as no great surprise to industry analysts.

Even under the DECC’s own impact assessment these measures could lead to the solar industry shedding up to 18,700 jobs.

It could have been worse, but for the solar industry successfully lobbying against the original proposal in August 2015 to pay just 1.63 p/KWh. Now, the government has accepted a more gradual decline in payments although spending on the FiT scheme will be capped at a maximum £100m annually for new installations, effective from February 2016 to the end of April 2019.

Offshore wind farm

Government u-turn on subsidies

A July 2015 report from the Office of Budgetary Responsibility (OBR), forecast a £1.6bn overspend in the cost of subsidies, largely due to higher than expected capacity being built under FiTs and the RO.

Offshore wind projects were producing more energy than forecast; and wholesale electricity prices have fallen, due mainly to lower than expected gas prices.

Under the levy control framework (LCF), established in 2011, the cap placed on total payments above the electricity price to low-carbon projects was set to rise annually in line with investment through 2020, towards a £7.9bn target, but with the added flexibility of a 20% headroom to cope with uncertainties.

Commentators in the renewables industry weren’t shocked when the government – which has pledged to keep down household energy bills – removed the guaranteed level of subsidy for biomass conversions and co-firing projects for the duration of the RO, better known as “grandfathering”. It argued this will cut allocations under the LCF by around £500m annually in 2020/21.

Against this backdrop the government also launched a consultation on controlling subsidies for solar PV of 5 MW and below, to take effect as from April 2016. Grace period arrangements were to be granted.

As Dr Nina Skorupska, Chief Executive of the Renewable Energy Association, puts it: “The removal of the supplementary charge for the oil and gas industry amounts to a £1bn giveaway, added on top of the subsidies planned for nuclear, gas and diesel... while renewables are getting continually squeezed and blocked.

"If the government are serious about their national and international commitments they need to back up the empty rhetoric with real actions.”

The Committee on Climate Change argued in its September 2015 Technical note: Budget management and funding for low-carbon electricity generation that the levy control framework depends on the level of contracted generation.

Clearly, if more renewable projects receive contracts more money is likely to be spent from the LCF. This is particularly true in the case of FiTs and the RO where, because contracts under these conditions operate on an “all-come, all served” basis, the risk of overspend is correspondingly greater.

Michael Rieley, Senior Policy Manager at Scottish Renewables, notes that while onshore wind and solar PV are already among the cheapest forms of electricity generation, a number of sudden, and largely unexpected, cuts to the renewables sector could leave onshore wind, and a few others, as the only forms of generation left to deploy based on the wholesale price alone.

He said: “The publication of the fifth carbon budget in November reaffirms what the Committee on Climate Change – the government’s own advisors – have already said: the amount of renewable electricity generated in the UK must double by 2030 if we are to meet our legally binding climate change targets."

The government is clearly looking for the renewable energy sector to stand on its own two feet, sooner rather than later, and sooner than the industry would prefer. In this political climate, the target for renewables’ market share that has been set out by the legislators could prove to be a tough one to meet.

The full version of this article appears in the May 2016 edition of CA magazine.


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