UK: DECC U-Turn Puts Renewables At Risk

Last Updated: 11 November 2015
Article by Clare Hatcher and Tom Chapple

On a recent trip to China the Chancellor of the Exchequer, George Osborne, announced that Infrastructure UK, a body set up by the last Coalition Government to provide Government-backed, financial guarantees for vital infrastructure projects, will provide the Hinkley Point C project with a £2billion guarantee.

A guarantee of such magnitude is clearly intended to encourage the completion of negotiations between EDF Energy, who will design and build Hinkley Point and two Chinese backers, China General Nuclear Corporation and China National Nuclear Corporation. Reports have suggested that in return for funding Hinkley and a second plant at Sizewell, the Chinese entities would take a controlling stake in a third at Bradwell, which would be the first Chinese-built and operated plant in the West.

Alongside the guarantee, the agreement between EDF and the Government provided for a strike price of £92.50 per MW/h, although this reduces to £89.50 per MW/h should Sizewell be built. On 6 October 2015, the average price on the N2EX Day Ahead Auction for 7 October 2015 was £54.56 per MW/h. In effect, this means that the British taxpayer (as at the 6 October prices) would be contractually required to provide EDF with nearly £40 for each MW/h produced at Hinkley.

In contrast, the Government has recently announced significant changes to the renewables sector, especially in relation to the Renewables Obligation (RO). The RO has been one of the main mechanisms supporting large-scale renewable electricity generation. Broadly, electricity suppliers are required to source increasing proportions of their electricity from renewable sources, which are evidenced through the annual submission of Renewable Obligation Certificates (ROCs). The ROCs are purchased by electricity suppliers (either directly, or from a trader who has purchased the ROCs from the generator), with the revenue generated through the sale of the ROCs subsidising the generation of electricity from renewable sources. The electricity suppliers are then allowed to pass the cost of the ROCs on to their customers.

The Government has suggested that reform of subsidies in the renewables sector is required due to a significant increase in the Government's liabilities under the Levy Control Framework (LCF). The LCF originally provided for £7.60billion in 2020-2021 (at 2011/2012 prices) but the Office of Budget Responsibility projects that the liability in 2020-2021 will, in practice, be close to £9.1billion. With the UK currently producing around 20-25% of electricity from renewable sources and with the target being at least 30% by 2020, the Government has decided that it can afford to scale back its fiscal support.

The RO was closed to large-scale solar PV on 1 April 2015 and to large scale onshore wind from 1 April 2016, a year earlier than intended. The Government's grandfathering policy, which provided certainty about the level of subsidy, has also been removed for new biomass conversion and co-firing stations and for existing units when they move between the firing bands. Finally, with effect from 1 October, DECC removed the ability to pre-accredit under the FIT scheme which provided certainty about the tariff rate for the subsidy. The Government has suggested that "the removal of a tariff guarantee, alongside the control proposals of the FIT Review" is "of critical importance in ensuring the overall value for money of the FIT scheme and limiting the impact of rising policy costs on consumer bills."

The contrast between the Government's changes to the subsidy regime for the renewables market and the amount of state aid being deployed at Hinkley is striking. Drax's decision to pull out of its carbon capture project at Selby, Yorkshire may be the first major casualty of the Government's change in direction. It remains to be seen whether the policy changes on subsidies will inhibit the development of renewables projects in what is a nascent industry.

A version of this article was first published in Construction News, October 2015.

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