Renewable energy in United Kingdom

1. Introduction

The UK is focused on developing a future energy system fit for the energy transition. One that enhances efficiency, reliability and reduces emissions, accommodates new renewables developments of greater scale and number, and is flexible enough to adapt to the wider landscape of new developments that might affect the use of the electricity system. These include the emerging hydrogen sector in all its various colours, the electrification of the transport sector, carbon capture schemes and the related infrastructure to transport and store carbon, decarbonisation of industrial clusters, RAB-supported new nuclear build, nascent programmes for small modular reactor technologies, new “cap and floor” based interconnectors (some with large captive overseas renewables projects from which to import power), multi-purpose interconnectors, offshore hubs, subsea HVDC transmission bootstraps, energy islands and many more.

Into this complex mix sits the target of net zero emissions by 2050 and interim targets towards that. This has kept policy makers frantic with new energy legislation, support schemes and various other mechanisms to maintain momentum and growth in renewable energies as well as provide the right signals to the other parts of the energy industry.

The UK enacted The Energy Act 2023, a major new legal framework that establishes new or modified rules for energy production, security and sectoral regulation. The Act reforms many areas. Among other things, it introduces new frameworks such as for Carbon Capture and Storage, new mechanisms to support technologies such as low-carbon hydrogen projects, and seeks to facilitate speedier deployment of or projects by, for example, making changes to environmental regulations for offshore wind.

The UK remains firmly committed to developing offshore wind, currently contributing approximately 13% to the electricity mix. The renewable source has an ambitious target to deploy up to 50 GW by 2030, making it a key component in decarbonising the power system by 2035. This growth is facilitated by the recent leasing rounds, supporting, and authorising the development of offshore wind projects around the UK. Furthermore, the recent legislative changes to the environmental regulations will improve the cost and time efficiency for project timelines. 

The Contracts for Difference (CfD) regime developed in 2012 remains the Government’s flagship scheme to encourage investment in renewable electricity generation. It is seen widely across government and industry as a successful programme that has supported renewable projects for technologies such as offshore wind, solar and tidal and has played a pivotal role in the expansion of renewable energy. Not surprisingly, proposals for new technologies and schemes frequently draw heavily on the CfD regime.

Offshore wind has pride of place in the pantheon of technologies that the UK is looking to catalyse. Outside of China, the UK’s offshore wind capacity and programmes remain the largest in the world, currently contributing approximately 13% to the electricity mix. With an ambitious target to deploy up to 50 GW by 2030, the recent lack of bids for offshore wind CfDs in Allocation Round 5 felt like a knockback for the sector. However, the pipeline of offshore projects is vast, with further site leasing rounds planned that will expand this pipeline even further. While there are many hurdles for projects to be consented, financed and commissioned, there seems to be cross-party support from both the Conservative government as well as His Majesty’s Most Loyal Opposition that genuine geopolitical issues (impacting prices and borrowing costs for the offshore sector) are addressed to avoid derailing these ambitious plans.

The number of developments is broad and so for the purposes of this chapter we have focused on the CFD regime, the Electricity Generation Levy and the expansion of offshore wind as three illustrative areas.

2. Contracts for difference regime

The Contracts for Difference (“CfD”) regime was developed as part of the government’s Electricity Market Reform Programme & was implemented pursuant to powers under Ss6-26 Energy Act 2013. 1
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 CfDs are one of the government’s main tools for supporting the generation of low-carbon electricity. 

Developers of renewable electricity generation projects often face high upfront costs and long project lifespans. The regime incentivises investment in renewable electricity generation using a known strike price; this offers protection against electricity wholesale price which can be volatile. The use of a known strike price also protects consumers from paying increased costs at time when electricity prices are high. 2
https://www.gov.uk/government/collections/contracts-for-difference

CfD regimes based on the UK model are now being implemented in a number of other countries following the success in allocating private capital and debt in the UK market. An evaluation of the CfD regime was carried out by the government in March 2021. Most respondents in the report stated the CfDs were successful in lowering the cost of capital for low-carbon electricity generation projects as the greater certainty in revenue lead to lower interest rates. The revenue certainty was also reported to have attracted new types of investors to the industry such as the more conservative pension funds; subsequently this has led to more competition and more attractive debt finance rates. 3 Evaluation of the Contracts for Difference scheme phase 3
https://assets.publishing.service.gov.uk/media/62839375d3bf7f1f3ef4838c/CfD_evaluation_phase_3_final_report.pdf
 

The fourth CfD Allocation Round (AR) opened for applications on 13 December 2021. This was the first time since AR 1 that there was a budget available for established technologies such as onshore wind and solar PV, and offshore wind had its own separate budget. 4
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 In this round there was £10m budgeted in each of the 4 delivery years for established technology which included: onshore wind (>5MW), solar PV (>5MW), energy from waste with CHP (5MW<<x<<50MW), landfill gas and sewage gas. £75m was budgeted in each of 4 delivery years for less established technologies, with a minimum of £24m per delivery year for floating offshore wind & £20m per delivery year for tidal, which included: advanced conversion technology, biomass with CHP, floating offshore wind, geothermal, tidal, wave and remote island wind (>5MW). £210m was budgeted in each of the 4 delivery years for offshore wind. The results were published on 7 July 2022. There were ninety-three successful projects: 1 energy from waste, 10 onshore wind, 66 solar PV, 1 floating offshore wind, 6 remote island wind, 4 tidal, 5 offshore wind.

Applications for AR5 opened 30 March 2023 and results were published 8 September 2023. £190m was budgeted in each of 5 delivery years for established technologies including: energy from waste with CHP, hydro (5MW<<x<<50MW), landfill gas, offshore wind, onshore wind (>5MW), remote island wind (>5MW), sewage gas and solar PV (<<5MW). £37m was budgeted in each of the 4 delivery years for less established technologies, with a minimum of £10m per delivery year for tidal, which included: advanced conversion technology, anaerobic digestion (>5MW), dedicated biomass with CHP, floating offshore wind, geothermal, tidal, and wave. There were ninety-five successful projects: 24 onshore wind, 1 remote island wind, 56 solar, 3 geothermal and 11 tidal.

At the time of writing, AR 6 is still anticipated. Further, it is intended by the UK Government that there will be annual allocation rounds in future to maintain investor confidence and speed of project development towards the 2030 renewables target and beyond.

3. The electricity generation levy

The Electricity Generation Levy is a temporary 45% tax that applies to qualifying generators that is levied on the ‘extraordinary returns’ and is paid in addition to corporation tax. The levy will apply to generators from 1 January 2023 until March 2028, and the UK government have forecasted it will raise £14.2 billion in that period. This development’s relevance to the renewables sector is because the levy will apply to companies or groups generating electricity from “nuclear, renewables, biomass, and energy from waste sources”. The levy does not apply to electricity generated under a Contract for Difference with the Low Carbon Contracts Company Ltd (LCCC), or electricity imported electricity from outside the UK.

Renewable energy generators came under scrutiny due to the perceived advantage of benefiting from the recent surge in wholesale electricity prices, primarily driven by a steep increase in wholesale gas prices. This upswing in global electricity prices has had a notable impact on the United Kingdom, where electricity rates are intrinsically linked to the price of natural gas. As a result, it was argued that some electricity generators in the UK experienced a substantial boost in their revenue streams surpassing typical commercial returns. The Electricity Generator Levy seeks to address and apply to these exceptional revenues. The generators within the scope of the levy would be assessed with respect to their increase in costs as a result of rising fuel costs or revenue-sharing agreements with third parties, in correspondence to the surge in wholesale electricity prices. The levy includes provisions for deducting a limited set of these exceptional costs when calculating the generators' liability.

The 45% tax applies to "exceptional receipts derived from wholesale electricity production." This signifies that the levy will be pertinent under the following conditions:

  • "Exceptional receipts" encompass wholesale electricity sales averaging over £75 per MWh within an accounting period.
  • It pertains to generators producing over 50GWh of in-scope electricity output within a year.
  • Furthermore, it solely applies to exceptional receipts exceeding £10 million in a given accounting period.

Despite initial concerns about its potential impact on the renewable energy sector, the government states that the levy has been designed to have a minimal effect. This is achieved by establishing a benchmark price that exceeds historical norms, thereby preserving a substantial portion of generators' exceptional returns and, subsequently, their motivation to invest in clean energy. According to the UK government following their consultation, comprehensive assessments have been conducted, and no further adverse impacts have been detected. However, developers who take merchant risk will have noted the risk of such interventions in future.

4. Offshore wind expansion

The offshore wind market has been one of largest growing renewable energy sources in the UK. The development of offshore wind continues to be driven by the strong public support for projects combined with the hitherto falling costs of offshore wind power. This was demonstrated by the offshore wind prices in the Allocation Round 4 contract for difference auctions being 65% less than the auctions in 2015, making offshore wind one of the cheapest forms of generating electricity. At the time, the UK Government increased their offshore wind deployment target in the ‘Offshore Wind Net Zero Investment Roadmap’ from 30 GW by 2030 to 50 GW. Subsequently, legal frameworks such as The Energy Act 2023, enacted into law on the 26th of October 2023, have been implemented to achieve this target and create a cleaner and more secure energy system. The “biggest piece of energy legislation in the UK’s history” implements changes that aim to enhance the efficiency of the energy system to support the development of low-carbon technologies including changing the procedures presiding over offshore wind projects to shorten the consent process.

One of the key parallel regimes facilitating this ambitious target are the offshore wind leasing rounds, such as the so-called “Round 4” leasing round run by The Crown Estate in 2019. These leasing rounds allow developers to apply for seabed rights and build offshore windfarms. The rounds in England & Wales are managed by The Crown Estate. Round 4 added circa 8 GW of offshore wind capacity to the pipeline to be delivered by 2030 via six projects. The leasing process works through an invitation to tender (ITT) process in two stages to incentivise developers to only bid for the most tenable sites, in an attempt to enhance the prospect that the projects would be completed. The first stage includes a forward-looking assessment and the second implements various procedures including restrictions on the number of projects and the total capacity each bidder can bid on. Following the bidding and selection process, in July 2022 the six successful projects selected for the seabed leasing agreements were cleared to proceed by the Government. Then, in January 2023, The Crown Estate signed agreements for lease which, among other things, obligates the developers to begin paying annual option fees totalling GBP 879 million per year. In broad terms, the payments continue until they are ready to enter the seabed site lease.

The leasing process has also made strides in Scotland’s renewable market with ScotWind being the nation’s first offshore wind leasing round to take place in over a decade. The process was run by the Crown Estate Scotland (CES) in the same year as Round 4. Leasing of offshore wind rights was devolved to Scotland in 2017. ScotWind resulted in an initial seventeen successful projects in April 2022. Three additional projects were awarded agreements through the clearing process in October 2022. The twenty projects, thirteen of which are floating, would produce a total output of 27.6 GW generating capacity.

The leasing procedure was different to Round 4 in England and Wales. Among other things, an extra requirement for supply chain commitments was implemented, which was the first of its kind in the UK. This involved using Supply Chain Development Statement (SCDS) Outlooks which outline how the developers will source the products, materials and labour in order to complete the projects. This first leasing round is estimated to generate £755 million in option fees and contribute on average £1.5 billion per project to the Scottish economy through the supply chain spend.

There are more projects set to be added to the offshore wind pipeline such as leasing Round 5 which plans to deploy floating offshore wind technology in the Celtic Sea and regenerate the ports infrastructure in the region. The plans are for three projects, located off the coast of Wales and Southwest England, with the aim to produce a capacity of 4.5GW (with a further potential for 12GWs being considered). Further initiatives include Crown Estate Scotland’s Innovation and Targeted Oil & Gas (INTOG) leasing round, the world’s first leasing round to enable the direct supply of offshore wind energy to offshore oil and gas platforms. The investment opportunity is intended to help decarbonise the North Sea operations using 2 types of projects, (IN) small-scale innovation projects of 100 MW or less, and (TOG) offshore wind which directly provide electricity to oil and gas infrastructure.13 projects have been selected and offered exclusivity agreements, 5 IN and 8 TOG.

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Munir Hassan
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Dalia Majumder-Russell
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