The Department of Energy and Climate Change (DECC) has today published the results of the first round of competition for Feed-in Tariffs with Contracts for Difference (FiTs CfDs, hereafter CfDs), a subsidy mechanism that will run alongside the Renewables Obligation (RO) until the latter closes to new entrants in early 2017, when CfDs will become the sole subsidy mechanism for large scale renewable electricity generators.
DECC's documents can be viewed here:
Statistics: Contracts for Difference (CFD) Allocation Round One Outcome
Breakdown of the outcome by technology, year and clearing price.
The most salient facts are:
1. The main beneficiaries of this round are offshore wind (two sites; total capacity 1,162 MW) and onshore wind (15 sites; total capacity 749 MW). Solar (72 MW) and Advanced Conversion Technologies (62 MW) are the next largest but of a different order of magnitude.
2. The guaranteed prices awarded in this round are significantly below both the strike prices determined administratively in previous DECC announcements, and, still more importantly, suggest that the income delivered by the RO since 2002 has been excessive. For example, the two offshore wind projects have accepted prices of £119.89/MWh and £114.39/MWh, as opposed to an announced strike price of £140/MWh, which is also approximately the current income under the RO, a reduction of about 18%.
The onshore wind projects announced today have accepted prices between £79.23 and £82.50, a reduction of about 18% on the strike price of £95/MWh, which is also the approximate income under the RO. The solar prices awarded today represent a saving of about 58% on the strike price of £120/MWh, which is in fact already somewhat less than the current income per unit received by solar farms qualifying for double ROCs.
We infer that the vast over-supply of consented renewable electricity projects, on which REF commented in May 2014 (Progress towards the 2020 Renewables Targets: http://www.ref.org.uk/publications/313-progress-towards-the-2020-renewable-electricity-target), and the restrictions on the available subsidy budget resulting from the Treasury's Levy Control Framework (LCF), has put enormous pressure on the renewables industry, and on the wind industry in particular.
Indeed, these prices suggest real concern verging on panic amongst those with consented projects that are unlikely to be built before March 2017, when the RO closes to new entrants. Such companies may well fear they will be unable to obtain subsidy at all and will therefore not be able to proceed with construction, with the development cost so far incurred being written off. Thus, industry participants have found themselves in a classic prisoner's dilemma bargaining situation, and, desperate to secure a CfD subsidy contract, some companies have broken ranks and accepted lower levels of subsidy than would be preferred by the industry as a whole.
Nevertheless, the prices announced today are important and set the scene for the future. It will be difficult for government to justify awarding contracts with higher prices than these, and many companies will now find themselves with consented projects that have no reasonable prospect of being built since the income levels in today's announcements are insufficient to deliver the very high rates of return that all but completely de-risk their schemes and make the projects or planning consents saleable at high prices.
This will, however, result in attempts both desperate and greedy to build quickly and register under the more attractive Renewables Obligation while it is still available. The Levy Control Framework may consequently be placed under considerable strain, and Government will almost certainly have to consider an early closure of the RO to new onshore wind entrants, as they have already closed it for solar.
Overall, the most important conclusion from today's announcement is that previous criticisms of the Renewables Obligation were correct. The RO was and is an overly generous scheme that resulted in hyperprofits for many technologies. In 2002 when the RO was introduced the wholesale price of electricity was approximately £20/MWh, with a Renewables Obligation Certificate bringing in a further £45/MWh, giving a total income of £65/MWh, more than three times the wholesale price and even at that time arguably very generous indeed for many technologies, including onshore wind.
Wholesale prices rose sharply after this point, with ROC values being roughly stable, increasing the total income for onshore wind, for example, to between £90 and £100/MWh, well in excess of that formerly thought more than sufficient to motivate investment. However, government took no action to reduce the RO subsidy in the light of rising wholesale prices, and only introduced minor changes in 2013 when it reduced the ROC banding for new onshore wind entrants to 0.9 ROCs per MWh, equivalent to a £5/MWh reduction from £45/MWh about £40/MWh in subsidy.
As a consequence of government's failure to act firmly there has been a development stampede for onshore wind and, more recently, for solar. This overheating has resulted in very bad proposals, a great deal of justified anger amongst actual and prospective wind and solar farm neighbours, and a general disenchantment with the renewables sector. What was promised to the public as a grass roots phenomenon where small would be beautiful rapidly turned into oppressive corporate style property development with little or no concern for the local environment. It was and continues to be a public relations disaster.
It is clear from the onshore wind prices announced today, which are equivalent to a subsidy level of about £32/MWh for onshore wind, that the subsidy rewards so far obtained and still being obtained under the Renewables Obligation are excessive, and that in 2013 DECC was wrong to oppose pressure, presumed to come from the Treasury, to cut the RO level for onshore wind by 25% (http://www.telegraph.co.uk/news/earth/energy/windpower/10177891/Wind-farm-subsidies-cut-by-25-per-cent.html).
In the light of today's prices, and in the consumer interest, DECC should now revisit the subsidy levels under the RO, and reduce the number of ROCs awarded per MWh to future and existing schemes. In other words the cuts to ROC levels must be immediate and retrospective.
Furthermore, there is a strong case for making this review retroactive, with the aim of recovering excess subsidy income already obtained by the industry.
Consumers have paid out approximately £15 billion in subsidies to renewable electricity generators since 2002 when the RO began, with the current annual total being in excess of £3 billion per year. Of that £15bn total, roughly £4bn has been paid in total to onshore wind, and the annual subsidy to onshore wind is currently running at about £750m a year. If the UK's onshore wind fleet were being paid the CfD prices announced today that total would be about £550m a year, suggesting that perhaps £200m a year, or 25%, is currently in excess of need. The historic excess of over-support will clearly be significant and could well amount to several hundreds of millions. Consequently, there is a strong case for retroactively recovering as much as possible of that excess and redistributing it to consumers.