Policy “perfect storm” sees UK renewable energy attractiveness crash

Quarterly index by EY highlights impact of “meagre” subsidies for solar power on investor confidence.

Antony Oliver
22 September 2014

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Reduced government subsidies for solar generation and “meagre” support for other established and less established renewable technologies has seen the UK fall in the latest global index of renewable energy investment attractiveness. 

According the latest quarterly Renewable Energy Country Attractiveness Index by consultant EY, the UK’s appeal to investors is now at its lowest level for almost five years, with China and other emerging markets of India and Brazil gaining ground. . 

“What we are seeing is a ‘perfect storm’ of reasons prompting a fall in the appeal of the UK’s renewables market."  Ben Warren, EY Environmental Finance Leader.

Following recent energy market reforms and a move to a competitive auction mechanism with Contracts for Difference (CfD), the report highlights that UK Government now plans to withdraw Renewables Obligation (RO) support for solar projects above 5MW two years earlier than planned. 

It adds that the draft budget for October’s first CfD allocation round proposes reduced subsidies of £205M, already prompting legal challenges from industries impacted.

The report points out that “established” technologies such as onshore wind and solar PV awarded contracts for project delivery beginning 2015/16 will receive £50M a year, while “less established” technologies such as offshore wind, wave and tidal energy will receive £155M for projects beginning 2016/17. 

“What we are seeing is a ‘perfect storm’ of reasons prompting a fall in the appeal of the UK’s renewables market," said Ben Warren, EY Environmental Finance Leader, commenting on the UK’s fall from 6th place to 7th place in the index. 

“The booming UK solar sector, one of only six markets globally to surpass the 5GW installed capacity, was caught by surprise by the Government’s consultation in May,” he added. “Legal challenges and investor petitions have been launched in response, urging the Government to give the sector more time and greater policy stability to compete with conventional fuels.’

Warren said that the small size of the pot of subsidy left to allocate across the sector meant that there was rising concern over the UK as a renewable investment destination.

“To continue to compete for international capital, the UK’s market reform and upcoming Contract for Difference (CfDs) regime will have to go a long way to repair the damage or recent policy mishaps.” Ben Warren

“There is simply not much left in the pot,” he said. “60% of the funding available has already been allocated leaving investors and developers concerned about budgetary constraints for future projects.”

By comparison, competition in the international market is intensifying with emerging markets increasingly threatening the UK’s ability to attract investors, the report says. 

China sits at the top of the index for the first time since May 2013 while Europe and the US have lost ground to emerging markets, according to the report, which ranks 40 renewables markets on their attractiveness in the eyes of investors.

The report states: “India’s new government is proactively overhauling its energy sector to galvanize public and private renewables investment. Brazil, Chile, South Africa and Kenya are developing robust deployment pipelines and consistent policy support, while major project financing in the Netherlands and Israel have prompted a boost for these markets.

Warren concluded: “To continue to compete for international capital, the UK’s market reform and upcoming Contract for Difference (CfDs) regime will have to go a long way to repair the damage or recent policy mishaps.”

EY’s UK renewable sector analysis

Clearing the EC hurdle. 

In late July, the UK’s transition to a competitive auction mechanism that awards contract for difference (CfD) FITs received state aid clearance from the European Commission (EC), another milestone in the Government’s Electricity Market Reform (EMR). This is welcome, but must be seen in context – just another small step in a very slow transition under the EMR.

Pots of cash. 

Within days of the EC approval, a draft budget for October’s first CfD allocation round was released proposing £205M (US$340M) of support split between two categories: “established” technologies like onshore wind and solar PV awarded contracts for project delivery beginning 2015/16 will receive £50M (US$83M) a year, while “less established” technologies such as offshore wind, wave and tidal energy will receive £155M (US$257M) for projects beginning 2016/17. The budget reinforced a May decision not to allocate any subsidy support for coal to biomass conversion plants.

Meagre portions. 

The final budget won’t be announced until late September, but has already attracted criticism. While it recognises the need to save budget for future years, it also seems overly cautious and short of what is needed to drive down the cost of renewables in the long run.

The UK’s Solar Trade Association (STA) has described it as “absurd”, because even applying the whole “established” budget of £50M to solar PV would support only 1GW of capacity, a considerable reduction given the market’s potential.

The £155M allocation for “less established” technologies would also barely cover one small offshore wind project. The EMR stalemate has stalled investment in new UK projects, and these constraints are likely to exasperate this. Some cynics may think this is the policymakers’ intention.

Value for money

Adding to the disappointment, the UK National Audit Office (NAO) said the Government has overpaid CfD subsidies to the five offshore wind and three biomass projects awarded early Final Investment Decisions in April. It is “not convinced” the decision to award £16.6bn (US$28bn) of contracts — equivalent to around 58% of the UK’s total available funding for renewables between 2015 and 2020 — is worth the risk to taxpayers, and says it may have undermined future bidding rounds by expediting contracts without ensuring enough price competition.

Solar pleas 

Four of the UK’s largest solar companies are legally challenging the Government’s May announcement of its intention to withdraw Renewables Obligation (RO) support for solar projects above 5MW a year 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 allow it to compete with conventional fuels, and avoid risking the UK’s position in the booming global solar market.

Big statistics 

The UK has now become only the sixth nation to surpass the 5GW installed capacity mark for solar PV, according to NPD Solarbuzz. Around 1.5GW of new capacity has been installed in the first half of 2014 – more than in the whole of 2013 –putting the UK on track to become this year’s fourth-largest market for new solar deployment. Martifer, a Portuguese clean energy developer, plans to develop 100MW in the UK by early 2015, and a joint venture between China’s Znshine Solar and UK-based MAP Environmental has agreed a US$680M deal to develop a 400MW solar portfolio.