United Kingdom

United Kingdom

Fears about cost of capital for UK offshore wind

EMR plan needs serious revision, warns influential group of MPs

UK offshore wind developers may find it more expensive and increasingly difficult to raise finance under current government plans to overhaul support for low carbon electricity generation from 2017, a UK parliamentary committee has concluded.

The government must improve its proposals for electricity market reform (EMR) and undertake a more thorough assessment of the impacts of EMR, argues the UK House of Commons energy and climate change select committee. The committee's report has identified serious weaknesses in the government's draft energy bill.

The concerns of offshore wind developers are given an airing in the report, with two issues attracting the most attention:

- contracts for difference (CfDs) and the risk that low carbon developers will face higher costs of capital because CfDs will not be underwritten by government, as previously expected

- the risk that CfDs will be rationed, leading to sudden unavailability when one or more project developers are ready to negotiate CfDs and proceed to financial close.

Confusion has intensified about who will carry legal liability for CfDs since publication of the draft energy bill in May. This was when the government appeared to renege on a previous promise to underwrite CfDs.

"A [CfD] counterparty model that is underwritten by Government would be the best way to instil investor confidence and reduce financing costs," states the report. If the government does not take on responsibility for underwriting CfDs, investors may view them as less creditworthy and demand higher returns on investment for backing renewables projects, including offshore wind developments. This would increase the cost of capital for project developers.

A cap on the value of CfDs issued over a given period could result in sudden rationing. This might delay projects and, in turn, undermine their financial viability. The committee's report quotes Scottish Power's chief corporate officer, Keith Anderson: "The concern for us would be that once we start investing […] on a large offshore project where I am likely to have put at risk £100m to £150m to get it there and then I get to FID [Final Investment Decision] and I do not know if I am going to get a contract or not, that is an unacceptable risk."

Anderson stresses the need for transparency on how the "levy control" would work and enough flexibility to ensure developers are not told: 'Wait 18 months because there is no money left'.

Rationing of CfDs would represent a new "development risk", notes the committee. Its report urges the government to introduce a "two-step or pre-registation process" designed to give developers early assurance that their projects will be granted a CfD, perhaps once projects have received planning permission.

Significant revision to the draft energy bill is expected in the autumn. However, some of the committee's recommendations may be resisted by the UK finance ministry, which refused to give evidence to the committee as it prepared its report.


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