By Guy Chazan
The pot of money that ministers have set aside to subsidise UK renewable
power is likely to run out much more quickly than previously thought,
according to research, placing green energy projects in jeopardy.
An analysis by Aurora Energy Research suggests the government has its
forecasts wrong on wholesale electricity prices. It says these will fall
much more quickly over the next few years than Whitehall’s models suggest.
The lower the market price, the more the government has to subsidise
low-carbon energy. Yet the subsidy total has been capped, meaning it could
be used up more quickly than ministers predict.
This could have worrying implications for many big offshore wind projects
in development, which are heavily reliant on state incentives.
The UK needs such projects to go ahead if it is to meet its legally binding
target of generating 15 per cent of energy from renewable sources by 2020.
Signs have emerged that concerns about the size of the subsidy are already
having a chilling effect.
John Feddersen, Aurora’s chief executive, said several offshore wind
projects had recently been reduced in size “because people are uncertain
about whether they’re going to get the support”.
In its analysis, Aurora predicts the wholesale price of electricity will
drop from the 2013 average of £51 per megawatt hour to about £46/mwh in
2020 and £41/mwh in 2030. The current price is below £40/mwh, partly
because of the mild winter.
These prices are significantly lower than those in the Department of Energy
and Climate Change’s forecast. A chart published in a departmental report
in March put prices at about £68/mwh in 2020 and £80 in 2030.
Mr Feddersen said part of the problem was that the DECC’s figures did not
take into account the Treasury’s decision to freeze the carbon floor price
– a tax on electricity generated from fossil fuels – in this year’s Budget.
“The world has changed substantially since DECC made its forecasts,” he
said. “Gas is a lot cheaper than it was, carbon price support has been
frozen and there is more renewables penetration.”
A department official said: “Our projections for wholesale gas prices and
the new electricity market are based on long-term trends rather than
short-term fluctuations in prices.”
At issue is the new system of subsidies introduced last year by the coalition.
This guarantees developers a long-term, stable price for the energy they
produce. If the market price for electricity is lower than an agreed
“strike price”, they receive a top-up payment and, if it is higher, they
have to pay the difference.
But the support is not unlimited. Under a scheme known as the Levy Control
Framework, the government has capped the cost of energy programmes funded
through customer bills. The LCF spending cap will rise to £7.6bn in 2020
from £2.35bn in 2012.
Mr Feddersen says that because power prices could end up being lower than
the department believes, the top-up payments will be higher.
“With Aurora’s price forecast, the LCF is not going to be big enough,” he
said. “It means government won’t procure as much renewable capacity as
they’ve projected.”
The DECC said it was confident “the LCF can deliver the levels of
low-carbon electricity set out in the delivery plan we published in
December 2013”.
But RenewableUK, a trade body that represents the wind industry, echoed
Aurora’s warning, saying there were big concerns that the cap on the LCF
was too low.
“This is why the government should review the LCF cap every year to
establish whether it’s adequate, and look carefully at all its underpinning
assumptions, including those on wholesale prices,” said Maf Smith,
RenewableUK’s deputy chief executive.
2 Comments