The decision last year by the UK government to an early reduction of subsidies for onshore wind, effectively cutting support for established technologies, has been taken a step further in the latest annual budget. [Engerati-UK Onshore Windfarm Subsidies Take A Cut]
Support for offshore wind
In one of the key announcements for the energy sector, an amount of £730 million (per year for each year of 15-year contracts) has been allocated for offshore wind and other less established renewable technologies in three Contract for Difference (CfD) auctions to be held this parliament. In the first auction which will take place later this year, £290 million will be awarded.
The total capacity for the auctions is capped at 4GW, which corresponds to about a third of the offshore wind capacity currently under development. As of May 2015, 7.4GW of capacity had gained planning consent, including the 2.4GW Dogger Bank Creyke Beck, the world’s largest, and applications had been submitted for a further 5.2GW. [Engerati-Offshore Windfarms Set To Reach New Levels] Further, other new developments are now entering the planning stage, the latest being two 1.8GW windfarms, Norfolk Vanguard and Norfolk Boreas, which Vattenfall is proposing off the coast of East Anglia.
Competition for these CfDs is thus likely to be intense but developers will need to look closely at their costings. Initial support for offshore wind is to be capped at £105/MWh, falling to £85/MWh for projects commissioning by 2026. Competition can also be expected from marine energy developers with for example tidal lagoon power potentially able to compete on CfD strike price with offshore wind. [Engerati-Swansea Bay Project To Pioneer Tidal Lagoon Power]
CfD was introduced by the government in 2013 as a mechanism to support renewable energy development by giving certainty to investors by reducing their exposure to wholesale price risk, while protecting consumers from paying for higher support costs when electricity prices are high. Under CfD a generator is paid the difference between the ‘strike price’ reflecting the cost of investing in the technology and the ‘reference price’ reflecting the average market price for electricity.
CfD is not the only support mechanism for renewables and the Renewables Obligation continues to be open to new investments until 31 March 2017, or 31 March 2018 subject to an investment grace period. This provides an income to offshore wind generators, which supplements revenues from the wholesale electricity market.
UK small modular nuclear reactor
Bucking the anti-nuclear trend prevalent in some countries in Europe and tapping into the growing interest in small nuclear reactors, the budget statement announced phase one of a competition to identify the best value small modular nuclear reactor (SMR) design for the UK. Taking forward the commitment made in last year’s Autumn Statement to invest £250 million in nuclear R&D innovation, this first phase is aimed to generate a list of SMR developers.
SMRs, typically up to 300MW in capacity, are expected to offer a (relatively) low cost and rapid to deploy form of clean energy. [Engerati-Nuclear Energy Advances] However, they are still in the relatively early stages of development and there are none in commercial operation.
The government considers the UK has the potential for global leadership in nuclear innovation and that SMRs could be a high value opportunity for local industry. An SMR delivery roadmap is promised for publication later this year. In addition, £30 million will be allocated for an SMR-enabling advanced manufacturing R&D programme to develop nuclear skills capacity.
Smart technologies get a push
The National Infrastructure Commission’s recent ‘Smart Power’ study, which in broad terms concludes that interconnection, storage and demand flexibility could help meet carbon targets and secure future energy supply, has been welcomed with some reservations from the industry. [see e.g. Engerati-Smart Power, Smart Meters and Smart Batteries] Notwithstanding these the government says it will implement the recommendations and will work with Ofgem to remove regulatory and policy barriers, “positioning the UK to become a world leader in flexibility and smart technologies, including electricity storage.”
An immediate consequence of this is an allocation of £50 million for innovation in these technologies over the next 5 years to help new technologies and business models access the market. However, there is no indication of how these funds will be awarded.
Support is also mentioned for delivery of at least 9GW of additional interconnection capacity – an 80% increase on previous estimates.
In addition, there will be a consultation later in the year on the future of the £100 million Network Innovation Competition. The Competition has supported several innovative network projects since its introduction in 2013 and the intention is to maximise the delivery of genuinely innovative projects and technologies.
Budget in summary
While at the political level the budget had a good deal of fallout, from an energy perspective it can be viewed as broadly positive.
Some other noteworthy announcements for the sector are as follows:
• Action on energy market recommendations such as encouraging more switching
• Changes to energy taxes to encourage businesses to invest in energy efficiency measures
• Transfer of the Wave Hub wave energy testing facility to Cornwall Council and provision of around £15 million to develop the facility as part of a new MarineHub Enterprise Zone aimed to make the region a leader in the development of marine renewable energy. [Engerati-UK’s First Smart Energy System Takes Shape in Cornwall]