Renewable Energy Capital, UK
DECC recently announced onshore wind and solar support levels under the new Contracts for Difference (“CfD”) support mechanism will be revised downwards from 2015-16 by £5/MWh compared to the draft strike prices issued earlier in the year. In contrast the offshore wind industry has been rewarded with the offshore wind strike price not being tapered so drastically in 2018/19 as was previously planned.
This revision of the draft strike prices for onshore wind and solar remains politically sensitive but these latest reductions will significantly affect future prospects for both the onshore wind and solar development industries especially once the Renewables Obligation (“RO”) support mechanism is withdrawn in 2017.
The reduction in support levels is driven on the principal assumption that capital costs will continue to decrease and benchmark project returns can be trimmed to reflect a lower risk return profile under CfDs. But for onshore wind a £5 strike price cut is equivalent to a greater than 10% ROC cut which is a big drop and means much will depend on the realisation of further capital cost reductions and the emergence of other operating efficiencies.
Regular review of tariffs is right to ensure they continue to reflect project economics but these latest reductions have been pinned principally on the assumption costs will fall compared to today’s prices. The ability of these technologies to meet these targets is linked to their maturity. Solar has achieved 50% cost reductions in the last 2-3 years but for onshore wind these reductions have been much more modest. This begs the question – how much further will costs drop and at what rate? It is reasonable to assume that the rate of turbine and panel cost reduction will slow; whether these technologies will be viable under 2017 strike prices is uncertain.
In contrast offshore wind, after a concerted lobbying campaign, has secured a reduction in the tapering of offshore wind support of £5/MWh in 2018/19 compared to the original proposals. On the surface this may be seen as a little gain a long way out but this change is there to undo a perilous position offshore wind developers may find themselves in – in which they have invested large sums into projects that then become unviable because of falling support levels. This is in part because lead times to develop offshore wind are much longer than for other technologies.
Ultimately these projects will make big contributions to the government’s 2020 15% renewables target so the failure of projects such as the Atlantic Array to come forward could put a big dent in the deliverability of these objectives.