It’s an interesting time in the world of UK renewables just now.
The main government subsidy is the new Contracts for Difference (CFD) mechanism. Under this mechanism, bilateral contracts are offered by a government owned counterparty, guaranteeing a fixed period of financial support.
The original timetable for the current round of contracts, awarded by a sealed-bid auction process, was to have seen bids submitted in early December and contracts sent to successful applicants for signature in the first two weeks of January.
However, as a result of appeals and reviews, this timetable slipped, and it was then looking like auction notices would be published on 23 December, with bids to be submitted in early January; for some, not the most relaxing of Christmas holidays.
But this didn’t happen, and on 20 January the timetable changed again. The auction finally opened, and sealed bids were invited, on 28 January, with the bidding window running from 29 January to 4 February. The winners are to be announced shortly, on 26 February.
Notably, DECC decided that the auction would cover both established technologies (onshore wind and solar) and also less-established technologies (offshore wind, biomass, combined heat & power, advanced conversion technologies, anaerobic digestion, wave and tidal).
Onshore wind and solar were bidding for a total of £65m of funding, whereas the budget for the less-established technologies was actually increased by £25m (to £260m) for projects commissioning during and after 2017/18.
An increase in the budget pot sounds good, but this is where it gets interesting, because if the recent fall in global oil prices is sustained it could have a big impact on the affordability of UK renewables subsidies.
Unlike traditional feed in tariffs and “quota” support schemes such as the Renewables Obligation, these new CFDs are critically linked to wholesale energy prices. The guaranteed financial support on offer is a “top up” on that wholesale “brown” power price – if that price drops, the top up increases so as to deliver the same overall revenue.
Although the price has recovered slightly, the recent dramatic fall in oil prices is a headache for the UK government, by risking a significant strain on the renewable support budget.
This budget is actually funded by consumers through add-ons to energy bills, but is constrained by the so-called levy control framework. Without that constraint, the design of the CFD scheme means that a dramatic fall in oil prices has the potential to hit consumers hard in the pocket.
The framework also provides a useful signal for investors of the UK’s appetite for supporting renewables developments.
As to whether the low fossil fuel prices we are currently seeing will actually act as a constraint on renewables development more generally, the jury is out. In the past, it has certainly been the case that low oil prices have diverted investment away from renewables.
But nowadays the energy policy landscape is far more complex, not least the environmental agenda, which has created renewables portfolio standards across the globe, and of course security of supply concerns.
But perhaps it’s the inherent volatility of oil prices which means this current price trough, so damaging to the likes of Russia and Venezuela, will actually not harm the clean tech industry.
After all, quite apart from the costs of developing a large-scale solar park (which have dropped substantially over the past few years, and are becoming increasingly competitive with coal and gas), the fuel cost of sunlight is fixed – and free of charge until such time as a politician can find a way of selling it to us.
* Andrew Whitehead is the Senior Partner at Birmingham and London law firm SGH Martineau LLP and leads the firm’s energy and climate change practice.