| State of the Renewable Industry FIGURE 8 FORECAST LCF SPEND BY SUPPORT MECHANISM (£m)
4,000 4,500 5,000 5,500 6,000 6,500 7,000 7,500 8,000
Figure 8: Forecast LCF spend by supportmechanism(£m)
315 263
57
267 222
66 904 477
29 -
31 4,448 2015/16
165 296
4,675 2016/17
setting the total investment volume, the CfD budgets act to create a ceiling on the capacity deployed and therefore the capital required. Also clear from the limited number of projects bidding for CfDs for delivery before 2018 is the industry preference for existing support mechanism (RO) where available. Only c. £8m of budget is required to fund all successful CfDs in the three years leading to the closure of the RO, compared to £87m in the first full year where the RO is not available (2018/19). There is a risk that the cost of funding the RO could increase significantly if a number of projects, for example those unsuccessful in the FIDe process, aim to commission before the closure of the RO in April 2017. In this scenario the headroom within the LCF to support future CfD rounds would come under increasing pressure. Inevitably, comparisons will be made with
the strike price of £92.5/MWh (real 2012) being offered to nuclear new build. However, the CfD agreed with Hinckley has been negotiated bilaterally and it will be bespoke in its terms, not least the 35 year tenor and risk sharing mechanism, meaning direct comparisons should be made with caution. In summary, while these announcements will not reduce future consumer bills, as the lower than expected strike prices just mean we get more renewables for the same amount of money, the direction of travel for the costs of both solar and offshore wind is good news. For project developers, it is time to take stock and rationalise portfolios,
- 1 4,833 2017/18 4,921 2018/19 2019/20
Results fromthe competitive auction certainly draw attention to the apparent generosity of the FIDe contracts, while Government has been vocal in recognising the success of the competitive auction in terms of securing investment at an affordable level for consumers, who will ultimately bear the price risk removed fromgenerators. It is important to recognise the discussion between affordability within the context of the LCF budget (which serves to limit the regulatory support that can be recovered from consumers) and the capital affordability of the projects themselves.
including dropping less attractive projects that cannot compete in this new auction world and focus on further cost reduction potential for their better projects. For policy makers, the outcome is a clear endorsement of the Electricity Market Reform programme, although no doubt there will be lingering questions on the FID enabling process. Results from the competitive auction
Sources: Contracts for Difference allocation round one outcome, DECC, February 2015
certainly draw attention to the apparent generosity of the FIDe contracts, while Government has been vocal in recognising the success of the competitive auction in terms of securing investment at an affordable level for consumers, who will ultimately bear the price risk removed from generators. It is important to recognise the discussion between affordability within the context of the LCF budget (which serves to limit the regulatory support that can be recovered from consumers) and the capital affordability of the projects themselves.
Sources: Contracts for Difference allocation round one outcome, DECC, February 2015 CfD administrator confirms no PV projects for 2015/16, Solar Power Portal, 7th April 2015 Notes: The LCC has confirmed that Wick Farm and Royston Solar Farm, both of whom secured a strike price of £50/MWh, will not proceed Sources: Early contracts for renewable electricity, NAO, June 2014
Assumes FIDe projects achieve an average load factor of 45% or 12.4TWh across five successful projects
2020/21
In summary, while these announcements will not reduce future consumer bills, as the lower than expected strike prices justmean we getmore renewables for the same amount ofmoney, the direction of travel for the costs of both solar and offshore wind is good news. For project developers, it is time to take stock and rationalise portfolios, including dropping less attractive projects that cannot compete in this new auction world and focus on further cost reduction potential for their better projects. For policymakers, the outcome is a clear endorsement of the ElectricityMarket Reformprogramme, although no doubt there will be lingering questions on the FID enabling process.
553 5,691
54 35
2 6
848 6,151 1,093 1,182
Headroom Pot 2 Spend Pot 1 Spend FIDe Costs
RO, FiT, CfD non-renewable LCF Cap
RENEWABLE ENERGY VIEW 2015
Investment in Renewables
www.r-e-a.net
REview Renewable Energy View 2015 83
This report is solely for the use and benefit of Renewable Energy Association and should not be relied upon by any other party. State of the renewable industry - Investments in renewable electricity, heat and transport
£m (2013/14)
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