18 Jun 14 – The UK government’s Department of Energy and Climate Change (DECC) has not made a contingency plan for the UK’s new electricity market reform in the event of Scottish independence – a move that has prompted concern from the industry.
“What will the impact of [Scottish Independence] on the electricity market reform be? I can’t speak for the Scottish government or what policies they would take on… I have no reason to suspect they would want to rip things up, but it’s up to them to decide their energy policy should the Scottish people vote yes,” Ed Davey, the Secretary of State for Energy and Climate Change told this news service. “We are not preparing for Scottish independence at all.”
The purpose of the electricity market reform (EMR) is to promote investment in low-carbon energy generation via subsidy mechanisms to attain the EU 2020 target of a 20% reduction in CO2 emissions.
A large proportion of the energy projects that possibly qualify for these subsidies are situated in Scotland. For offshore wind, for instance, 45% of the 4.32GW of projects that have received development consent are Scotland-based, according to industry body Renewable UK.
An independent Scotland could mean the subsidies for projects get axed, putting them in jeopardy, said Lakis Athansiou, a utilities analyst from Agency Partners. He noted that SSE and SeaEnergy Renewables’s 920MW Beatrice offshore wind project could possibly see reversed the subsidy mechanism it was recently awarded.
A person close to the ‘big six’ utility SSE told this news service that a vote for Scottish independence is one of the many issues the industry is grappling with. Concerns include the odds of a renewable project securing a subsidy, continuous changes to the regulatory framework, and the likelihood of subsidy mechanisms being abandoned should the Labour party win next year’s election.
“Risks are too great and there aren’t many people willing to take them,” said a person with knowledge of SSE, which shocked the market with a sudden exit from the 340MW Galloper offshore wind project in March.
“People are anticipating that something is going to happen after the election. There is still a risk that the whole of the UK’s renewables program is dismantled. It is all so uncertain,” Athansiou said. “If you’ve got the option, you go outside the UK. It is a trend and we will see more of this.”
The electricity market reform
DECC is in the early stages of rolling out electricity market reform (EMR), aimed at de-carbonising the UK market. The main pillar of the bill is the introduction of contracts-for-difference feed in tariff, known as CfDs. Under a CfD low-carbon generators will sell their energy on the wholesale market price as usual, with the CfD allowing for a set strike price through a sizeable subsidy that is specific to each generation technology.
A cap on the amount of subsidies available, known as the levy control framework, of GBP 7.6bn has been allocated between 2015 and 2020. Firms must place bids in an auction for a CfD. The exact mechanics of the process have not been disclosed. Therefore the chances of being awarded a CfD are not certain.
“A big concern is the auctioning; how these CfDs will be allocated,” said the person close to SSE. “In the case of offshore wind – the cost of getting a project to the table is GBP 100m. The risks that it wouldn’t get a CfD are high. This is one of the reasons why SSE is not taking forward the offshore wind projects.”
CfDs for offshore wind have been seen as marginal at best. There is uncertainty over whether there could be reasonable returns. It’s often project dependent and on a knife edge, notes Steven Hunt, an equities analyst at UBS.
He added that he knew of several large offshore wind projects that were unlikely to be realised, including the 7.2GW Dogger Bank offshore wind project, which is under development by SSE, RWE, and Norwegian energy companies Statoil and Statkraft. Notably, Statoil and Statkraft also recently put their joint operational offshore UK wind farm project, Sheringham Shoal up for sale.
Moreover, DECC has made some unexpected changes to its policies. In June 2013 the draft strike prices for several technologies were announced. In December, however, they were revised. The strike prices for onshore wind were reduced by GBP 5/MWh, to GBP 95/MWh for 2014/15 – 2016/17 and then GBP 90/MWh for 2017/18 – 2018/19. The strike prices for solar power also saw a reduction, while the strike price for offshore wind was slightly increased.
DECC also changed its mind on what projects would be awarded a coveted early CfD. Despite being notified last year that had secured an early CfD, Drax’s second biomass conversion unit, Heckington Fen onshore wind farm, Beinn Mhor onshore wind farm were excluded from the draft in April. These two factors had huge repercussions on investor confidence.
“Up until now the UK was held in safe-haven status by investors,” noted Athansiou. “And it is a risk that CfDs will not go ahead.”
This sentiment is also echoed in parliament.
“There is a growing skepticism about the increase of subsidies among the parties. The mood is changing in parliament,” said Member of Parliament Peter Lilley, who is also a member of the House of Commons Committee for Energy and Climate Change. “Contracts for Difference are not legally binding until somebody has signed up to them. Hopefully the government will become less generous.”
The increase in renewable subsidies in recent years, coupled with the falling price of wholesale energy has squeezed gas-fired power stations to the point where it is only profitable to run during times of high peak power prices. This means they do not operate most of the time. Many have been permanently closed or mothballed. But gas-fired power is necessary for balancing the grid, to compensate for the intermittency of renewable generation.
As part of the EMR, the government is to introduce a capacity mechanism; a tariff paid to energy generators to keep their plants on standby even when it is deemed unprofitable for them to be generating power. The payments will be launched in 2014 for electricity contracts for delivery in 2018, a timescale criticised by several utilities.
SSE decided to take its 710MW CCGT Keadby plant, and several other smaller units, totalling about 1GW, offline by the end of 2014. It cited low margins from gas-fired plants, policies boosting the carbon price and the delay to the capacity mechanism as the cause.
Dong Energy, Denmark’s largest utility responded by selling its Severn CCGT power plant in Wales. RWE in April told this news service it would like to divest its UK CCGT power plants Pembroke and Staythorpe. Iberdola also told Mergermarket it wanted to relinquish its UK gas-fired power plant fleet, but said there were no buyers.
“Not going to re-invest in thermal power in the UK in the foreseeable future,” Benji Sykes, Dong’s head of asset management told this news service.
The 2015 governmental election could see a change of leadership. This could threaten the electricity market reform, the two equity analysts said. This is especially likely in light of opposition leader Ed Milliband’s recent mantra of freezing energy prices, they added.
“Until you get greater clarity on Labour Party policies, which may not come until 2015, or a dramatic depoliticising of the topic, I don’t think we’ll see any new substantial infrastructure in the UK,” agreed Steven Hunt at UBS. “Most utilities will see other countries as less risky than the UK.”
By Katie McQue