United Kingdom

United Kingdom

UK gov't fails to clarify post-RO policy

Uncertainty about design of CfD regime

Most UK offshore wind developers are far more concerned about government's plans for a new financial support scheme, to go live in 2017, than today’s news that the national government has failed to clarify the rate at which it will provide financial support to new wind power projects beginning operation between now and 2017.

Offshore wind developers are frustrated and worried about continuing confusion over how the post-2017 financial support scheme, based on contracts for difference (CfDs) will operate. Key questions remain unanswered about the legal structure that will be created to underpin the system and whether so-called strike prices will be set at a level that ensures offshore developers can attract the investment they require.

An announcement had been expected before the UK parliament’s summer holiday about wind subsidy rates to be provided via the existing renewable obligations (RO) regime between 2013 and 2017. However, the UK Department of Energy and Climate Change (DECC) confirmed this morning that an announcement will not be made before the UK parliament begins its holiday tomorrow.

It is thought that the primary reason for this failure to clarify RO rates is a dispute between DECC and the UK finance ministry about how much financial support to provide to onshore wind projects.

Unease about CfDs

The RO rates for the 2013-2017 period are a minor worry for many UK offshore wind developers compared to rapidly-proliferating concerns about a new financial support scheme that will replace ROs from 2017 onward. The new regime will support all types of low-carbon energy projects – including new nuclear generation -  and will be designed, in part, to reduce fluctuations in the price low-carbon operators receive for the electricity they sell.

Under the incoming regime, offshore wind developers will sign a contract for difference (CfD) for each project prior to financial close. A key feature of each CfD will be their ‘strike price’. When generators sell electricity at a level below the project’s agreed strike price, they will receive a top-up payment. However, when they sell above their project’s strike price they will be obliged to pay some of the excess to the government.

Although such a system provides a "steady revenue stream" and has "an inherent sense to it," so many details are missing about how it will operate that offshore developers are concerned, explained specialist energy lawyer, Ed Rimmell of Bond Pearce, speaking an event organised by the East of England Energy Group. There is a risk that potential investors will be put off by delays and confusion surrounding the introduction of a CfD-based regime.

Nervousness about the incoming CfD-based regime has grown since it has become clear that the UK government will not act as the legal "counterparty" to individual CfDs, despite having indicated that this would be the case in initial documentation.  

There is, currently, no clarity about how CfDs will be made legally robust, and this has, in turn, raised concerns that the timetable for introducing them will not be met. DECC’s current schedule foresees setting intial strike prices by late 2013.

Legal uncertainty

Uncertainty about the very legal foundation for CfDs was acknowledged by UK secretary of state for energy, Charles Hendry, in a 29 June 2012 letter written to Tim Yeo, chair of the House of Commons energy and climate change committee.

In the letter Hendry wrote: "The Government is aware of the importance of creating an investable CFD structure. We accept that there are concerns with the model we outlined…". The letter goes on to hint that the CfD concept may be significantly re-worked: "we are also assessing an alternative which is broadly similar to a conventional bilateral contract…".

Another question preoccupying offshore wind developers is the true length of CfDs and their attendant strike prices. Thus far, DECC has said these will last 15 years and will be protected against inflation via a link to the UK’s consumer price index (CPI). However, offshore wind developers have been alarmed to hear that the life-span of a CfD could be shortened if a project fails to develop at a pace prescribed by the UK government.

DECC may introduce "milestone deadlines" that developers must meet in order to receive a full 15 years of support, noted Bond Pearce’s Rimmell. Such a rule would be a serious worry to offshore developers constructing large projects that can be subject to unexpected technical and regulatory delays. A curtailed CfD would drag down a project’s return on investment.

Fundamentally, the UK offshore wind industry’s chief concern is that the financial attractiveness of its project portfolio is beginning to be undermined by confusion about the design and timing of the incoming CfD-based regime.

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