UK Wind Subsidy Cut Threatens Investor Certainty

The UK’s decision to cut subsidies for new onshore wind projects one year early may result in investor uncertainty.
Published: Tue 14 Jul 2015

We wrote recently about the UK Government’s plan to end public subsidies for new windfarms under the Renewable Obligation from 1 April 2016 – a year earlier than planned. [Engerati-UK Onshore Windfarm Subsidies Take A Cut.]

In response to this, Scottish Renewables is urging the UK Government not to pull the mat from under onshore wind development projects as it would have a “devastating impact” on onshore wind developers and the supply chain across the UK long term.

Cuts will put renewable investments at risk

Jenny Hogan, Director of Policy at Scottish Renewables, says that the decision to end subsidies would put around £3 billion of investment in Scotland at risk. In a press release, she urges UK ministers to reconsider their decision as it would affect Scotland the most since the biggest proportion of projects are being developed in Scotland. Scotland currently has over 110 operational wind farms. Most of the farms are concentrated in Aberdeenshire, the Highlands and Islands. A third of Scotland's energy needs were provided by wind energy last month, with over 620,000MW supplied to the National Grid, further highlighting the importance of the sector to the country.

Industry trade body Scottish Renewables demonstrated late 2013 that renewable energy generation is providing almost US$33 million (£20 million) of annual revenue to businesses, farmers, landowners, public sector organisations and homeowners across the country. Revenue is being produced by generating electricity on site and then feeding it into the national grid. Precisely US$32 million (£19.3 million) was earned in this way during 2013.[Engerati-Uncertainty Still Holding Back Renewable Energy in Scotland.]

Landowners’ returns from large scale wind farms have been increasing since their inception in Scotland, according to a recent report compiled by property management firm CKD Galbraith’s dedicated renewable energy department.

According to the firm, between 2002 and 2008, rents under new leases increased on average by 200%. In addition, from 2009 to 2010, rents rose by more than 10%. This figure is expected to grow further as demand for available sites increase.

Anti-business

Although the Department of Energy and Climate Change has announced that there will be ‘grace periods’ for wind farm projects that are significantly advanced to still proceed. However, the details around exactly how a company may receive a grace period remains unclear. Ms Hogan says that this lack of clarity is extremely damaging for investors. 

Scottish Energy Minister Fergus Ewing has recently blasted the planned cuts as anti-business: "All of this will come at great personal cost to our businesses and people."

Onshore wind is already the lowest-cost form of renewable energy and plays a massive role in delivering on the UK Government’s legally binding renewable energy targets and cutting carbon emissions.

Ms Hogan says that the new replacement scheme, Contracts for Difference (CfD), will have a negative impact on onshore wind development specifically. Within the CfD framework, there will be ‘longer-term uncertainty’ for the industry.

Sudden change causes investor uncertainty

Amber Rudd, the energy and climate change secretary who replaced Liberal Democrat Ed Davey after the election, said in a statement that the government wants “to help technologies stand on their own two feet, not encourage a reliance on public subsidies.” The attitude is that the subsidy worked and now it’s time to move on.

But while subsidy cuts are part of the move towards reforming the UK’s entire electricity market, and are in line with European guidelines designed to wean the industry off support, the UK government could be going about it the wrong way.

The sudden change in plans is bound to cause investor uncertainty in the renewables industry. In 2014—before the government won a new term in office at the general election—it promised the RO subsidy would continue for new onshore wind until March 2017. Spain experienced this not so long ago when the government removed solar subsidies so suddenly that the industry and investor confidence collapsed. Spain’s aggressive clean energy goals have been heavily subsidized by its government, and the government has fallen into economic distress as a result. Specifically, the New York Times reported in 2013 that Spain’s tariff deficit had built up a cumulative debt of about €26 billion ($35 billion). Since then, however, the country has slashed its subsidies, making utilities responsible for the bulk of costs. Since the subsidy cuts renewable energy has not grown much in the country as a whole.

RenewableUK, the wind industry trade body, says that this could happen in the UK. Its head Maria McCaffery called the move [to cut subsidies] “a chilling signal”, not just to wind power, but to investors in general.

More than money, the industry wants certainty. For instance, where or will the money [saved from subsidy cuts] be reallocated? Because investment decisions on large infrastructure projects have to be made far in advance, a stable regime—one in which the government keeps its promises—is essential if it is going to secure long term commercial investment: the very thing that will allow the subsidies to be removed without leading to a complete collapse.

Further reading

Financial Times- Spain To Deal Blow With Renewables

New York Times-Renewable Energy in Spain Is Taking a Beating