The UK’s alternative energy market in 2018: what does the future hold?

Looking into the future is a difficult business, particularly in an area such as renewable energy where government policy is so influential. However, past performance can be a good indicator. So what was the outcome in 2017 for alternative energy in the UK?

First, the good news. Figures from National Grid showed that 2017 was the UK’s greenest year yet in terms of electricity generation. An historic milestone was passed in April, when the UK experienced its first 24-hour period without using any coal power since the industrial revolution 135 years ago. British wind farms also produced more electricity than coal plants on more than 75% of days in 2017. Overall, Britain has halved carbon emissions in the electricity sector since 2012, resulting in the fourth cleanest power system in Europe and the seventh in the world.

Evidence of political support?
Politically too, the UK Government continued to demonstrate support for clean energy. In September, the second Contracts for Difference (CfD) allocation round completed, with 16 contracts signed for 10 projects, representing over 3GW of new renewable generation capacity. These included three offshore wind farms, five advanced conversion technology projects and two projects focused on dedicated biomass with combined heat and power. Together, the Government said these should result in enough renewable electricity to power over three million homes.

October then saw the launch of the Government’s Clean Growth Strategy, setting out ambitions for a low carbon future. In the foreword to the strategy document, Prime Minister Theresa May stated: “Clean growth is not an option, but a duty we owe to the next generation, and economic growth has to go hand-in-hand with greater protection for our forests and beaches, clean air and places of outstanding natural beauty.” The Government used the launch to highlight the UK’s past achievements: carbon emissions in the UK have fallen and national income risen faster and further per person than any other nation in the G7 – since 1990, emissions are down by 42% while the economy has grown by 67%.

One month later, in mid-November, the UK jointly launched with Canada the Powering Past Coal Alliance, bringing together 20 countries committed to moving from coal to cleaner power sources. Claire Perry, the UK’s Minister of State for Energy and Clean Growth, took the opportunity to repeat the UK’s commitment to ending unabated coal-fired power generation by 2025.

More recently, in May 2018, former energy minister Sir Michael Fallon called on the Department for Business, Energy & Industrial Strategy (BEIS) to set a target for all offshore wind turbines to contain at least 60% British content – up from the current 50% target. Sir Michael wrote to BEIS Secretary Greg Clark, explaining that he wants more of the £550 million earmarked for spending on turbines by 2025 to go to British companies.  

Another high profile project, the Swansea Bay tidal lagoon, is also a focus of current political discourse. The Government has yet to give an official response to the independent review of its viability. The review backed the project last year. Mark Shorrock, CEO of Tidal Lagoon Power, which hopes to build the lagoon, told a joint BEIS and Welsh Affairs committee inquiry in London in May 2018 that he had not met a UK government minister for 16 months – his only contact being with Greg Clark by letter in February 2018.

The decision on whether the £1.3 billion project will go ahead is dependent on agreement about the price to be paid for electricity from the scheme. Shorrock told MPs he would need a deal offering financial support of £89.50 for every mega-watt of electricity produced to build the 320MW project – but would still require additional support from the Welsh government and an unusually long contract. Otherwise, on a like-for-like basis, the Swansea tidal project would need a contract price of £150/MWh – well above the price of the Hinkley Point C nuclear power project and almost triple the price of the newest offshore wind power projects.

Lower investment
2017 was also a disappointing year in some respects. Recent research by Bloomberg New Energy Finance and shared with the House of Commons Environmental Audit Committee, revealed a dramatic fall in investment in wind and solar power last year. Investment in these renewable energy sources dropped by 57% in 2017 – and this was the second successive year of lower UK investment. The researchers attributed the fall to “changes in policy support”, including cuts to subsidies for installing solar panels in late 2015 and a ban on subsidies for onshore wind farms – policies imposed under David Cameron. The UK’s falling investment trend is in sharp contrast to experience in countries such as China, Spain, Canada and the Netherlands, where investment in wind and solar power increased last year.

Similar findings and conclusions were expressed in a recent report by SmartestEnergy, a subsidiary of Marubeni Corporation. The report also referred to the end of feed-in-tariffs and the Government’s decision to close the Renewable Obligation Scheme to new projects. The scheme required energy suppliers to source a proportion of their electricity from renewable sources. Iain Robertson, Vice President of Renewables at SmartestEnergy, commented: “The reduction in subsidies has inevitably slowed growth in the independent generation sector but these latest figures underline the significant role energy entrepreneurs continue to play as the UK shifts to a decentralised, decarbonised and digitised energy system.” SmartestEnergy’s report said that the changing financial environment meant the installation of new renewable energy projects capable of operating subsidy-free would “be the exception rather than the norm for some time to come”.

Looking forward
So what lies ahead in 2018? Could we see a resurgence in renewable energy investment? Might the Government change its tough stance on subsidies? The last Budget ruled out the possibility of any fresh funding for new renewable energy projects levied through electricity bills until at least 2025. However, energy ministers Claire Perry and Richard Harrington are known to be working on ways to support future onshore wind farm projects, encouraged by the improved economics of wind power. It seems that the fall in wind power costs could enable the Government to offer support to onshore wind projects in the form of ‘subsidy-free’ contracts, and so avoid breaking the past pledge to scrap subsidies.

Aurora Energy Research recently predicted that declining costs associated with solar and wind technology could pave the way for huge 18GW of subsidy-free projects to be built by 2030. Dr Jonathan Marshall, Head of Analysis at the Energy and Climate Intelligence Unit, told The Independent that the continued growth of independent renewables, despite worries over subsidies, was a good indicator of the health of the renewables sector. He said: “Drastic falls in the cost of electricity from wind turbines and solar panels in recent years mean that the long-term dream of ‘subsidy free’ renewables is now within reach.”

There is clearly still an appetite for renewable energy in the private sector. To take one example, energy giant EDF has announced its intention to start an “unprecedented acceleration” in renewable energy deployment. This follows a collapse in its UK nuclear revenues in 2017, but increased earnings by its renewables operation.

Cautious optimism?
It’s clear that there is considerable momentum behind the UK’s renewable energy sector. The Government continues to voice its support for clean energy and private sector appetite does exist. So there is much to be optimistic about, although no cause for complacency.

When launching the Government’s Clean Growth Strategy last year, Greg Clark said: “For the first time in a generation, the British government is leading the way on taking decisions on new nuclear, rolling out smart meters and investing in low carbon innovation. The world is moving from being powered by polluting fossil fuels to clean energy. It’s as big a change as the move from the age of steam to the age of oil and Britain is showing the way.” Industry insiders will be watching for new evidence in 2018 of that leading role.

Moore Stephens has a dedicated Renewable Energy team. To find out more about how we can work together, please contact us.

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