Winds of change? Onshore renewables and Contracts for Difference

Our team: Sam Tye

In March 2020 the Department for Business, Energy & Industrial Strategy (BEIS) proposed in its consultation paper relating to the Contracts for Difference (CfD) Allocation Round 4 that onshore wind and solar would be permitted to participate in the CfD Allocation Round 4.

This marks a change in recent UK Government policy. Onshore wind and solar have not been permitted to participate in CfD Allocation Rounds since the first Allocation Round in 2015. In the intervening period the UK Government has appeared to back the deployment of large scale offshore wind over the deployment of onshore renewables.

Since 2015 developers of, and investors in, onshore renewable projects have suffered a series of setbacks, most notably:

  • the withdrawal of the Renewables Obligation and Feed-in Tariff subsidies for new projects;
  • the removal of certain embedded benefits, following the Targeted Charging Review; and
  • in the case of onshore wind, an effective ban on planning permission being granted to the development of new projects in England and Wales.

The combination of the above has caused deployment of new onshore wind and solar in the United Kingdom to falter. It has threatened, at worst, to stifle deployment of onshore wind and utility scale solar altogether – development of new onshore wind and solar in 2018 in the United Kingdom was almost moribund. At best, such an approach to onshore renewables, has significantly reduced their contribution to the reduction in greenhouse gas emissions.

In 2019 the UK government set a legally binding target to cut greenhouse gas emissions to net zero by 2050. The 2019 Conservative manifesto was very light on detail as to how this target is to be achieved. In particular there was no mention of solar or onshore wind in the manifesto. In permitting solar and onshore wind to participate in the CfD we have our first indication that the UK Government is prepared to back these sources of renewable energy alongside offshore wind. The UK Government would appear to be adopting a different position to that set out by David Cameron as Prime Minister in 2014 when he said that people were “fed up with so many wind farms being built” and that “enough is enough” with respect to new onshore wind farm deployment.  It remains to be seen whether there will be a relaxation of the planning restrictions on new onshore wind in England and Wales: a legacy of David Cameron’s stance on onshore wind which is still with us today. It should be noted in this regard, that the BEIS consultation paper does put forward some proposals which if they are brought into effect may assist developers of onshore wind projects.

The inclusion of onshore wind and solar within the next CfD allocation round will be a welcome boost to the onshore renewables industry after such a difficult period.  Commentary around the CfD already suggests that CfD Allocation Round 4 is likely to be fiercely competitive with onshore wind farms in Scotland likely to make up a significant proportion of the projects bidding in the auction. A legacy of the difficulty in obtaining planning permission for new projects in England and Wales.

Looking ahead, does this change in UK Government policy represent an isolated act of benediction for the UK onshore renewables industry or does it represent the start of a series of measures that the UK Government may introduce over the next few years to support the renewables industry?

In its consultation paper on the CfD process BEIS comments that:

The UK’s new 2050 net zero emissions target means that we will continue to require substantial amounts of new, low carbon power sources to be built before 2050. In their report on net zero, the Committee on Climate Change (CCC) advise that the UK could require four times the amount of renewable generation from today’s levels, requiring sustained and increased deployment between now and 2050.

The key words in the above statement being “sustained and increased”. BEIS seemingly recognise that the current levels of deployment are insufficient to achieve the 2050 zero emissions target. In the same consultation paper BEIS comments that:

there is a risk that if we were to rely on merchant deployment of these [currently unsubsidised] technologies alone at this point in time, we may not see the rate and scale of new projects needed in the near-term to support decarbonisation of the power sector and meet the net zero commitment at low cost.

Whilst new onshore renewable generation assets are being deployed in the UK, they are, in the post-subsidy world, being deployed at a rate that is significantly below the level required to meet the net zero target. Until onshore renewable assets operating on a merchant facility basis are commonly seen by the market as an investable asset, it is likely that without government intervention the deployment of onshore wind and solar will not be a rate that is sufficient to adequately contribute to the UK’s 2050 net zero target.

The author suggests that opening up the CfD auction to onshore renewables may be the start of a number of measures that are instituted by the UK government over the next decade to support the deployment of these technologies. This will particularly be the case if the rate of deployment of new renewable projects remains depressed as against projections of the required deployment of new low carbon generation assets needed to achieve net zero in 2050. It would seem unlikely, however, that such measures will include a return to subsidies akin to the Renewables Obligation and Feed-in Tariff. What is certain is that over the next decade renewables will play an ever more prominent role in the generation of electricity in the UK.

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