IN DEPTH: UK's changing winds

Ed Davey: 'The energy-security challenge is one more reason for going green'

Ed Davey has given developers greater scope to shrink projects without incurring financial penalties

Ed Davey, the UK’s congenitally chipper energy secretary, tried to strike an especially buoyant tone in the days before he unveiled a final suite of surprises for the offshore wind industry in December — promising that “good news” was imminent.

Good news is exactly what the UK industry needed, after a bruising year of setbacks, including an apparent lowering of government’s medium-term ambitions for the technology amid growing political concerns about the country’s rising energy costs.

While the gladness of Davey’s December tidings remains debatable, no-one could accuse the government of slacking in the run-up to the holiday season — as it delivered a string of revelations with enormous implications for renewables in 2014.

It started in early December, when Davey announced tweaks to the Contract for Difference (CfD) scheme — the linchpin of the UK’s Energy Market Reform (EMR) package — that favour offshore wind at the expense of onshore wind and PV.

The headline from that announcement was that offshore wind farms brought on line in 2018-19 will receive £140 ($229) per MWh — up from the £135/MWh previously on the table.

The bump came after several big developers strongly suggested that some of their short-term projects would not proceed unless subsidies were boosted.

Although the £5/MWh bump was underwhelming in the eyes of some, its significance, both in practical and symbolic terms, is anything but irrelevant.

Offshore wind farms clinching CfDs between 2014-18 will deliver an 8-12% return on investment, “marginally superior” to what they would have seen under the existing Renewables Obligation scheme, says Bloomberg New Energy Finance analyst Sophia von Waldow.

Perhaps more importantly, by confirming the additional subsidy, the government signalled that it can live with the knowledge that offshore wind costs will not come down as quickly as it had hoped in the medium term.

What the government is hoping, of course, is that the increase will spark a few big project investment decisions, setting in motion a chain reaction that will ultimately see one or more turbine manufacturers commit to a UK factory.

halfdan-brustad.jpgIndeed, several big announcements were immediately forthcoming, although perhaps not quite of the variety Davey was hoping for.

On the bright side, Dong stepped forward and announced it would acquire Centrica’s 580MW Round 2 Race Bank project. The swapping out of Centrica, which seems to have grown cold on offshore wind, for Dong, the world’s most experienced player, can only be seen as a good thing for the UK sector.

However, Dong’s announcement was quickly followed by news that ScottishPower Renewables would walk away from its 1.8GW Argyll Array off Scotland’s west coast, with the Iberdrola-owned utility claiming the economics no longer stacked up.

The industry put its best face forward, with RenewableUK deputy director Maf Smith calling such attrition “a natural part of the development process” as the final subsidy rates are cemented.

Aside from the strike-price increase, sources say that other, more nuanced changes to the EMR package are playing just as much of a role in such decisions.

One important change is the government’s decision to give developers greater scope for “capacity flexibility” — or the ability to shrink projects without incurring financial penalties.

As things currently stand, developers will be able to trim projects by about 30% compared to their original application without penalty — an increase over previous proposals.

That extra flexibility “gives the industry the incentive it needs to continue to optimise development concepts and bring down costs”, says Halfdan Brustad, chairman of the board at Dudgeon, a Round 2 project being developed by Statoil and Statkraft.

Another key change would make it easier for projects to qualify for an earlier — and therefore higher — strike price.

Critically, these positive changes led the government to admit that it may have been a bit too stingy in the disappointingly low offshore wind estimates for 2020 it issued this summer — estimates that unleashed a sense of dread across the sector.

One of the most contentious elements of the December updates relates to a handful of offshore wind projects that may be awarded early CfDs in 2014.

After confirming in early December that seven offshore wind projects remain in contention, the government two weeks later said that just four of those — three of them owned by Dong — are considered “provisionally affordable” in the context of its short-term budget.

The three that were not deemed affordable for now — Neart na Gaoithe, Beatrice and Inch Cape — are all in Scottish waters, sparking an outcry in Edinburgh.

While some in the industry are cynical about the government’s motivation for dangling the prospect of an early CfD in front of some projects, there is little question that having a contract in hand will make it easier for developers to reach final investment decision and begin moving into the water.

The government expects to take a final decision on the early CfDs in the spring, and intends to approve the first contracts by the end of the year.

As if to put a positive stamp on all the CfD changes, on 18 December the government gave the final nod to plans for the £450m offshore-wind-focused Able Marine Energy Park along the Humber Estuary, northeast England.

On the same day, the EMR bill was approved by the Queen and thus formally became law, although changes will still be enacted via secondary legislation in 2014.

While it may take the offshore sector a few months to process the full impact of Davey’s December of “good news”, one thing is certain — it got off easier than most other renewables.

The onshore wind sector, in addition to seeing its CfD strike price lowered, was informed that developers may have to start competing for projects in auctions as early as next year.

If nothing else, the offshore wind industry can take comfort in knowing that it has weathered the most tempestuous months of EMR’s evolution.

For the UK offshore sector, 2013 was a year of enormous political activity. The industry and government alike can only hope that the spotlight turns in 2014 from Westminster back to the country’s windy seas.

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