The UK government has introduced legislation committing the UK to reducing its net contribution to greenhouse gas emissions to zero by 2050. This commitment makes the UK the first major economy to enshrine such a commitment into law. However, the Committee on Climate Change has noted that while the UK is on track to meet its 2018-2022 carbon reduction commitments, the carbon reduction targets for the 2023-2032 need further efforts to decarbonise.
Solutions to meeting the UK’s decarbonisation targets while ensuring security of supply and affordability for consumers are needed, as the UK expects that all coal generation will come offline by 2025. Although substantive generation capacity is forecast to be provided by new nuclear and possibly clean gas with carbon capture and storage (CCUS) technology, this is subject to concerns about both delay and commercial viability. Separately, the UK Government in March 2019 announced plans to support 30GW of offshore wind to be commissioned by 2030 signalling that offshore wind will continue to be a focus for renewable generation.
Like other maturing renewables markets, many of the UK’s main renewable technologies do not have subsidy support which has led to development of new contractual structures and increased the value of long-term revenue contracts secured with corporate offtakers rather than utilities.
The UK’s position is unchanged from 2018 and it’s in 8th place in EY’s index of the most attractive countries for renewable energy investment.
1. Brief overview of renewables sector
The UK government’s latest statistics show that electricity generation in the UK from renewable sources increased in 2018 to a record 33%. As at the end of 2019 Q1, installed renewables electricity capacity stands at 45GW, a 7.9% increase from the previous year. Onshore and offshore wind contributed to 49% of this growth continue to make up half of total renewable capacity in the UK. Onshore wind capacity stands at 13.8GW, which represents 30.6% of all renewable capacity, the highest share of renewable technologies. Solar PV (29.5%), offshore wind (18.9%), and bioenergy (16.8%) are the next biggest contributors to the UK's renewable capacity.
The main support scheme for new renewable generating stations is through the CFD (contract for difference) mechanism which was introduced under the Energy Act 2013. The other schemes such as the Renewables Obligation scheme and the feed-in tariff scheme for certain renewable generators with a maximum capacity of 5MW have now closed (March 2017 and April 2019 respectively).
Small-scale generation is still supported through a smart export guarantee regime which requires electricity suppliers of a certain size to offer to enter into contracts with owners of small, low-carbon electricity generation installations. This will provide a guaranteed route to market for small-scale renewable generation in the absence of the feed-in tariff regime. The regime, introduced by the Smart Export Guarantee Order 2019 is expected to come into force on 1 January 2020.
2. Recent developments in the renewables sector
In November 2018, the Department for Business, Energy & Industrial Strategy (BEIS) announced the third round of CFD allocations for the “less established technologies” – Advanced Conversion Technology (ACT), dedicated biomass and offshore wind. A new addition for this allocation round was the inclusion of wind projects located on remote Scottish islands. The strike prices set for these projects could not be bid at above £82/MWh which is a 46.4% increase on prices that offshore wind projects could bid for (onshore wind is excluded).
The results of the third allocation round announced in September 2019, demonstrated the rapid decrease in the cost of offshore wind. Nearly 6GW of capacity in the 2023 / 2024 and 2024 / 2025 delivery years was awarded CfD contracts with falling by 30% since the lowest strike price seen in the second CfD auction in 2017. As a reminder in 2017 the strike prices achieved were (GBP 74.75 for delivery year 2021 / 22 for all technologies, GBP 57.50/ MWh for offshore wind and GBP 40.00/ MWh for ACT for delivery year 2022 / 23).
In 2019, the offshore wind, remote island wind and advanced conversion technologies achieved strike prices of £39.65/MWh (2012 prices) for delivery year 2022 / 23.
Given that the CFD is the main method by which a project can achieve investment certainty, the continuing fall in prices and the dominance of large offshore wind projects demonstrates this sectors confidence in being able to deliver profitable projects at prices almost on part with wholesale electricity prices.
These results are driven by improvements in technology, supply chains and cost of capital make the technology less reliant on support mechanisms. Therefore, while fewer projects may be able to secure additional revenue support through CFDs, there is growing appetite for “subsidy-free” CFDs which offer the price stability but not the additional revenues.
A subsidy-free approach appears to be a viable consideration with recent reports such as that by Baringa in April 2017 which reported that onshore wind could clear a subsidy-free CFD auction with prices of GBP 49.90, resulting in a forecast net payback to the consumers of GBP 18m over a 15-year period. Technological advancements in the capacity and productivity of renewable technology (such as turbines), significant reductions in capital costs, revenue stacking capabilities and increasing O&M efficiency amongst other factors have seen the UK's first subsidy-free projects emerge. Anesco’s 10MW solar farm and the Withernwick II 8.2MW wind farm are examples of such subsidy-free projects.
The ongoing exclusion of “established technologies” – comprising Energy from Waste, Hydro (>5MW and <50MW), Landfill Gas, Sewage Gas, Onshore Wind (>5MW), and Solar PV (>5MW) – and the absence of tidal and geothermal projects continues to raise questions about their development in the UK. At least in the context of onshore wind and solar PV projects there is some suggestion that these technologies may have already achieved grid parity and therefore are reliant on securing long term offtake contracts separate from seeking revenue support through subsidies.
Offshore Wind Leasing Round 4
The Crown Estate and Crown Estate Scotland are in the process of their latest round of offshore wind leasing, known as "Round 4" and “ScotWind" respectively. Round 4 launched in September 2019 and ScotWind is expected to launch by the end of 2019.
The Crown Estate has altered the bidding process for Round 4 in that there is to be a multicycle bidding process with a single project and site awarded per cycle. The bidding process is designed to award at least 7GW, with the maximum possible 8.5GW to be awarded. The Crown Estate has defined 'innovation' as one of its key objectives and has offered a 50% discount for the first five years’ of rent for up to 10% of the project’s capacity where there is deemed to be qualifying ‘innovation’.
ScotWind differs from Round 4 to the extent that no capacity cap has been designated and there is likely to be a focus on floating offshore projects. There is also an intention to have prescribed bands of option fees, allowing developers to select which band they would be willing to pay. This is in comparison to the competitive option fee process in Round 4 where bids are to be ranked by price and the site with the highest Option Fee Price will be selected.
Corporate PPA growth
Whilst Power Purchase Agreements (PPA) have been utilised for a long time, the emergence of the ‘Corporate PPA’ is still relatively new. Corporate PPAs are transactions between a generator and a corporate end-user. Corporate PPAs offer a solution to renewable energy developers seeking to mitigate the problems they face in the form of reduced subsidies and also large energy users, such as corporates, looking to secure a hedged position against volatile or increasing energy prices and source a percentage of their energy from a renewable source. Whilst attractive to both parties in this regard, the agreement is often complex and can be most complex. Despite this, 13.4GW of clean power were purchased in 2018, up from 6.1GW the year previous, by 121 corporates in 21 different countries.
Storage sector growth
The UK has seen rapid growth in the energy storage sector, which has been driven by falling costs of technology and the availability of new revenue streams. At scale, battery storage will allow renewables to represent a greater proportion of the UK’s power and help the UK to meet EU targets for renewable energy and its own ambitious net-zero target whilst also playing an important role in the future grid’s resilience.
Where only 20MW of commercial batteries were in operation in 2016, there was nearly 400MW of battery storage deployed in 2018 alone demonstrating the industry’s growth. UK storage capacity now stands at over 3.3GW and planning consents had been handed to a further 5.4GW of capacity at the end of 2018, with battery storage accounting for 4.8GW of this.
The UK government has acknowledged the potential for consumer savings with the deployment of technologies that provide flexibility, such as storage, and has incentivised the development and deployment of such technologies through funding competitions such as BEIS’ ‘Storage at Scale’ competition launched in January 2019 and recent industry consultations to explore how best to stimulate growth.
Hydrogen and EV developments
The UK government anticipates electric vehicles (EVs) shall transform the domestic transport sector. Transport remains the largest emitting sector of CO2 in the UK and the electrification of the industry is seen as pivotal to meeting emissions targets. Together with the net-zero commitment and the domestic policies in large cities (such as the low vehicle emission charge in London), electrification and hydrogenation of transport is seen an increasingly expanding sector for renewable investors. BEIS has recommended that the government brings forward its target of new vehicle sales to be emission free by 2032 from its original target of 2040.
Global stock of EVs increased to 5.1 million in 2018, an increase of 2 million the year before and there are forecasts that the number of EVs could reach 125 million by 2030. The UK currently ranks fourth globally by market share with EVs making up 1.7% of all new car and van sales. Projections show that UK stock could rise as high as 36 million by 2040. Policies such as the government’s ‘Road to Zero Strategy’, tax benefits and proposals to implement a requirement for all new homes to be fitted with EV chargepoints are testament to the UK's commitment to wide-scale deployment of EVs.
In the context of public transport (such as buses and trains), the role that hydrogen will play will also need to be explored and this is beginning to gain traction in the UK. The Office for Low Emission Vehicles’ Hydrogen for Transport Programme is supporting 33 hydrogen fuel cell electric buses for Aberdeen, Belfast and Liverpool while all London buses are pledged to become emissions free by 2037. The UK is forecast to have its first hydrogen trains operating as early as 2022
No Priority Access & Dispatch
The new EU legislative energy package (titled “Clean Energy for All Europeans”) has now largely abolished the “priority access & dispatch” regime for renewables. The RED directive (Directive 2009/28/EC) provided renewable projects with the right to (1) transmit and (2) be dispatched in priority to other sources of generation. However, the recast RED Directive (Directive (EU) 2018/2001) has removed this on the basis of the low marginal costs of renewables, which should mean that they are already within merit order for dispatch .
Although a “light” priority for certain projects regime is already in force (Regulation (EU) 2019/943), it will begin to apply from 1 January 2020. This means that under the EU (Withdrawal) Act 2018 (as it currently stands) the new regime will not be treated as directly applicable EU legislation part of “retained EU law” (i.e. domestic law) if the UK exits the European Union prior to 1 January 2020. This is on the basis that only “operative” EU regulations will be retained in domestic law – i.e. EU legislation that is both (1) in force and (2) applies before the UK’s exit. Therefore, unless the UK specifically legislates to include the recast electricity regulation within “retained EU law”, then new “light” priority regime will not be implemented in the UK.
For the rest of the recast RED directive, which has a transposition deadline of 30 June 2021, the UK’s position will also depend on whether it implements the recast RED directive before it exits the European Union. Otherwise, unless the current legislative and regulatory framework is amended to remove the current priority access and dispatch regime, renewables in the UK will continue to benefit from the existing right to be dispatched in priority and receive access the transmission system.
3. Forthcoming developments / opportunities in the renewables sector
The Energy White Paper
Although widely anticipated to be published in Summer 2019, the UK government did not publish its Energy White Paper (as at the time of publication of this guide). However industry sources, including Utility Week, reported that the unpublished energy white paper includes the following policy commitments:
- to decarbonise the heating systems of up to four million homes by 2030
- making energy efficiency a national infrastructure priority.
- a target of up to 40GW of new low-carbon baseload comprising new nuclear and power stations fitted with CCUS (carbon capture use and storage) technology.
- a target for CCUS projects to capture 10 million tonnes of carbon by 2030.
Much of this policy thinking is already subject to consultations published in Summer 2019 so the result and the ultimate policy trajectory depends in part on the consultation responses, and more importantly on the political leadership of BEIS.
For further details on net zero, green finance, energy storage licencing, CCUS, the offshore wind sector deal, and EVs, please see our recent articles on these subjects on Law Now.