by PERRY GOURLEY
FOR many in Scotland’s renewable energy industry, Thursday could prove to
be a long day in the office.
At 7am National Grid will announce the results of the sealed-bid auction
for the new Contracts for Difference (CfDs) mechanism which will subsidise
low carbon energy generation projects in the years ahead.
CfDs are a key plank of the UK Government’s sweeping Electricity Market
Reforms which aim to decarbonise electricity generation, keep the lights on
and minimise bills for consumers.
Under the first auction for the contracts, which will replace the current
Renewables Obligation (RO) due to be phased out by 2017, developers of
projects based on established technologies such as solar, hydro and wind
have submitted bids containing the lowest guaranteed price they would
accept per megawatt hour (MWh) of electricity generated. Awards will be
made on a technology-neutral basis to the lowest bidders.
According to energy lawyer Michael Murphy of MacRoberts, the change for the
industry is “seismic” and could have major implications both for Scotland’s
green energy targets and its ability to generate energy.
“I’m not sure that outside of the industry many people realise just how
drastic a change this is,” said Murphy.
He said that under the RO subsidy system developers were “pretty much
guaranteed” they would get subsidies, provided they ticked certain boxes.
“A gold rush was deliberately created so that the country could quickly
build expertise and make a headstart under 2020 targets. Now the government
has realised it has made quite a good start but it is costing too much
money and is introducing a mechanism that will primarily be attractive to
the big projects needed to hit the UK’s climate change targets.”
Murphy said the Scottish Government will be more nervous than most about
the results this week, warning that “CfDs could be the death knell for its
very ambitious targets”.
“They are dead set against new nuclear and are banking everything on the
big offshore wind projects getting support under a CfD system, which is
effectively a lottery.”
Niall Stuart, chief executive of trade body Scottish Renewables, said it
will be a “huge week for the sector”.
“In many ways this week is the culmination of years of changes to the way
that the UK supports investment in clean power generation from renewables,
nuclear power and carbon capture and storage.”
Stuart said much of the focus would fall on the outcome for offshore wind
projects planned off the east coast of Scotland.
“This is effectively a ‘winner takes all’ situation: there’s enough budget
to support one or two developments at most, with as many as eight projects
potentially submitting bids,” said Stuart. “The outcome of this process
will have a critical impact on our target for Scotland to generate the
equivalent of 100 per cent of its electricity from renewables by 2020. We
need a big chunk of offshore wind to do that, and at the moment we only
have one small project in operation, and one with a pre-agreed contract
from the UK Government.
“Together they only form about a quarter of the capacity we probably need
to hit the overall target so we need to see more projects coming through if
we are to make it.”
At an industry conference in Aberdeen last month, Scottish energy minister
Fergus Ewing expressed confidence that at least one Scottish offshore
project would be successful in the auction, although he was critical of how
little influence Holyrood has over the process.
“It is not right that we in Scotland have such a limited say in how
Scottish taxpayers’ money is spent, given that there is such strong support
for renewables in Scotland, but I am sure we will have a favourable result
in this auction,” he said.
While developers who are unsuccessful in this round will be able to bid
again in the next round, which opens this autumn, David Bone, head of
energy and natural resources at Harper Macleod, said that would not be
without difficulties, particularly for offshore projects.
“They would have to try to keep their project on track – and people
employed – until they can bid again in October 2015, with no guarantee that
they will be successful second time around,” he said.
Keith Patterson of Brodies – which has a number of clients bidding in the
first CfD round – said that although it would be a “nervous time” for
developers looking to get projects started in the months ahead, the outcome
would also have an impact on sentiment for long-term investment in the sector.
“It will be interesting to see what the continued appetite of developers is
beyond the next three or four CfD auctions,” Patterson said. “At the
moment, it looks like quite a risk for them as it is difficult to assess
whether projects will be viable.”
Although Thursday’s announcement will give the green light to some
projects, Bone said the uncertainty which has surrounded the process was
set to continue. “Even after Thursday there may be more questions than
answers as the Department of Energy & Climate Change will publish only
basic information on the successful bids, and no information at all on
unsuccessful projects,” he said.
“There have already been a lot of changes to the CfD process and the
amounts of money available in the various pots as the process has been
refined and it remains to be seen whether future governments, of whatever
colour, can provide the industry with the confidence that sufficient money
will be available to meet existing targets and those that still need to be
set, to allow the industry to move forward with assurance beyond 2020.”
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