The sun is setting on the Renewables Obligation (RO). The subsidy scheme, which has carried the renewable energy industry through its formative years, is due to close on the 31st March 2017. As discussed previously on Isonomia, much of the progress made against renewables targets – 23% of the UK’s electricity demand is currently met by renewables – has been the result of the scheme. So now, many are asking how the industry is going to successfully transition into the unknown territory of an almost subsidy-free environment.
That there has been a slowdown in the UK renewables sector is undeniable; however, it’s not all doom and gloom. There is still interest in renewables and projects are still in the pipeline and being developed. Despite RO support being withdrawn at such a crucial time, the fact that planning applications continue to trickle through and projects are being built must mean that there are alternative routes to market outside of subsidy. In particular, we are seeing signs of life in the market thanks to private wire schemes, falling technology prices and facilitating technologies.
In order to decarbonise its electricity supply as part of efforts to halt climate change, the UK has agreed to cut emissions by 57 percent by 2032 – a figure it’s currently nowhere near. Under the Climate Change Act 2008, the Government has a legal duty to publish an Emissions Reduction Plan. This was due by the end of 2016, but has been delayed by BEIS, first until February, and now to the end of March – or possibly later. The delay reduces the time available for industry and investors to plan for the changes it will signal, which will ultimately make change more costly.
There has been huge growth in the renewables sector over recent years, with a large amount of capacity now operational. According to the Energy and Climate Change Committee, however, the UK needs to do more on decarbonising electricity in order to meet its legally binding climate change ambitions. The absence of a favourable policy context in which to make things happen is a major barrier.
The growth to date is due to projects that benefitted from previous subsidies (RO and Feed in Tariff (FiT)), before scheme changes over the past couple of years. Now, the renewables development pipeline is drying up, and the chart below, drawn from the Renewable Energy Planning Database that Eunomia manages for BEIS, shows the dramatic drop in new planning applications submitted.
Most notably, there were no new solar PV planning applications made in the UK in Q4 2016, in contrast to a peak of 253 applications (1,317MW) in Q3 2015, shortly after the policy changes were announced. These changes included cuts to the level of FiT for solar PV, along with the Government’s closure of the RO in March 2016 to solar PV projects of 5 MW and below. Our intel from regular contact with renewable energy developers highlights the drying pipeline has led to job cuts in the renewables industry. Most recently, CS Wind has announced that its workforce of 154 is to be cut by around a third.
Down to the wire
Despite the slowdown, one significant source of hope is that private wire power purchase agreement (PPA) schemes are becoming more common. Private wire PPAs differ from grid projects (non-private wire projects) in that the PPA is between the generator and energy consumer, rather than the generator and energy supplier. These projects, in which power is consumed on-site/locally by customers, should provide the sector with new growth opportunities.
Private wire PPAs bring numerous benefits, and there are good number of reasons why the model should work:
- Consumers (e.g. industry, building owners, local authorities) get to fix their power price in the long-term, insulating them from expected price rises in the wider market.
- Consumers may obtain a lower price than they would on the retail market (though this is not always the case).
- The generator gets to sell at a higher price than they would via a PPA with a supplier (brown power + FiT + embedded benefits).
- Developers can potentially build despite not having a grid connection, which might otherwise have been a massive barrier (though they may need a battery to store excess power, for example if the development will consume less power at weekends).
Private wire PPAs are emerging with commercial and industrial end-users, providing developers with a new route to market. The well-known solar developer Lightsource has shown such confidence in the potential of the commercial PPA market that it has appointed consultancy firm Deloitte and real estate giant Cushman & Wakefield to support its push into this new area. Encouragingly, the company has already signed private wire PPAs with Belfast International Airport and Thames Water. Foresight Solar Fund has also recently acquired Shotwick Solar Park, which holds a private wire PPA with the adjacent UPM Paper Mill. In addition, big names such as Facebook and McDonalds have also signed PPAs with developers.
Though diminished, with this alternative route to market the renewable energy sector should also be able to retain interest in lending from banks. For example, Triodos plans to build and finance up to 50 MW of solar PV this year in the UK.
Nevertheless, private wire projects do face some challenges, including the following:
- Will the effort of setting it up be repaid? In financial terms, private wire power might not be cheaper than standard retail, especially if prices do not rise much in real terms.
- How much weight will customers give to non-financial benefits? Commercial projects often rely on the customer’s sustainability values and corporate social responsibility commitments, while public sector projects may focus on delivering against climate change targets.
- How much risk is there of stranded assets? During the payback period on an investment, private sector customers may fail, and even resource-constrained public sector clients may find they have to relocate.
Part of the answer to these challenges – and those for the renewable sector more broadly – may lie in improvements in technology. The International Renewable Energy Agency (IRENA) has predicted significant reductions in the cost of renewables thanks to increasing economies of scale, more competitive supply chains and further technological improvements. Solar cell technology is expected to have a ‘major impact’ in the near future, as are larger turbines and more efficient rotors which could reduce European offshore wind costs by as much as a third by 2030. Even multi rotor concept wind farms are being demonstrated. According to a recent Lloyds Register Report, with such technological innovations being deployed, renewables are soon to reach cost-parity with fossil fuels.
As discussed in an earlier blog, the business case for co-locating battery storage with renewable generation remains challenging. However, continued success in deployment is encouraging confidence in the role that co-location has to play. Camborne Energy Storage has installed a grid scale 0.5MWh Tesla powerpack at a solar farm in Somerset to demonstrate the possibility of providing a balanced grid. Additionally, Renewable Energy Systems has co-located a 0.64 MWh battery with a British Solar Renewables farm in Glastonbury to provide grid-services and ‘time-shift’ the solar power output to sell at the most attractive prices. Thanks to developments like these, both industry and Government are taking a hard look at the promise of energy storage.
Whilst we are unlikely to see the kind of growth we have over the last five years again, there are still opportunities for investment. Moreover, driven by wider climate change goals the Government may be forced to develop new policy mechanisms to make projects more attractive to investors.
Last November, the UK ratified the Paris climate agreement, committing itself to reductions in carbon emissions which will require a large scale decarbonisation of electricity generation by 2030. When it is eventually published, the Emissions Reduction Plan should provide much-needed insight into how the UK will achieve its targets. If there is sufficient will to turn these aspirations into actions through the development of a new policy landscape, we can remain optimistic that the renewable electricity sector will have an enormous contribution to make.
For now, the exact shape of this contribution remains unclear, although a combination of falling renewable costs, emerging technologies and private wire schemes provide the sector with new growth opportunities. There is scope for the renewable energy industry to continue to flourish, even in a subsidy free future, giving the UK energy security and stability while creating new jobs, driving investment and helping to achieve our Climate Change Act and Paris Agreement goals.