Blog: Which way will the wind blow?
Alan Shanks comments on wind farm subsidies as the UK government brings the closing date for the current regime a year ahead to April 2016.While changes to the timing and swiftness of the government’s announcement last week of its early withdrawal of the Renewables Obligation Certificates (ROCs) is surprising, that it was coming is not. The impacts are to be determined, but will be watched with interest both here and abroad.
The Conservative’s manifesto warned before the election that it would expedite closing down the current subsidy regime, to replace these with Contracts for Difference (CFDs) from April 2017, and the industry has been working towards this for some time. This announcement moves that closing date one year forward to April 2016.
On top of the potential, though much-discussed, political and legal issues, another significant implication of the announcement is that it undermines investor confidence in UK government policy by changing the rules. This is not something the UK is usually guilty of, and a reason why it - and Scotland as part of it- has been hugely successful in attracting foreign investment.
How the next few months play out will likely also influence investor sentiment in addition to any practical, legal or otherwise implications the early closure announcement has on the industry.
After all, 12 months is a significant period of time in any major energy project. It can make the difference between success and failure, delivery and suspension. Indeed, in this case, whether or not certain projects go ahead at all will be down to where they fall, development-status-wise, within those 12 months.
Investors will be aware of the long lead-ins required to deliver return, and might be discouraged from investing in a market with apparently changing goal posts.
But this is just supposition for now. Once details on the parameters of the grace periods are announced, we can fully assess the impact of the changes. In this case, the hope must be that the grace periods will be designed so that a significant number of projects that would previously have qualified for ROCs will still be able to be delivered. Although there is much talk of a Scottish legal challenge to the new closing date, until those details are revealed, we won’t get a true sense of which way the wind is blowing on that.
However, while the early closer of subsidies which many in the industry see as vital for continued strong growth is not the most welcoming of news, it is not a harbinger of disaster either. In Scotland, onshore wind power is already the most common renewable power source. We also boast 25 per cent of Europe’s total onshore wind resources, a success helped in no small part by ROCs, but a success which was never intended to remain subsidised indefinitely.
Subsidies are always temporary in nature and are typically withdrawn when a market matures and is able to operate effectively. As such, and whether or not there is a later legal challenge on the exact subsidy closer date, we must also prepare for the new world order; albeit it potentially coming faster than anticipated.
CFDs are the future of this industry. Presented as a more sustainable and proportionate market support mechanism, they are part of the government’s ongoing Electricity Market Reform (EMR), which seeks to maximise energy efficiency, and sustainability of the various power sources and supporting industries, which are consumed in the UK.
For investors, CFDs present a new structure of return on investment for renewable technologies which is designed to move the onshore wind market into the next maturation phase of its development. That this is even potentially possible so early, relative to other industries, is to be applauded.
Although still a relatively young industry, onshore wind is, overall, doing well and contributing greatly to the UK’s overall energy supply. Properly managed, it can continue – and thrive- without the subsidies. What remains to be seen is whether the early cut attempted now by the government will be too deep. If so, we can expect some stormy seas ahead.
- Alan Shanks is a partner and head of energy at HBJ Gateley, you can view his profile here.