Lumpy policy kills industries. Stable support allows them to thrive. Ask anybody in any industry what they most need and stable regulation, that enables steady growth and creates confidence among investors is surely at the top of the list.
So, it was no surprise that if there was a single theme that came through loud and clear at the Westminster Energy, Environment & Transport Forum Keynote Seminar, which took place in London on 12 July 2018, it was that stable policy and regulation supports the expansion of renewable energy.
In the UK, which has 7.2 GW of operational offshore wind, 4.6 GW under construction and another 10 GW approved or in planning, according to RenewableUK head of policy Barnaby Wharton, a stable regulatory environment in the form of the contracts for difference (CfD) regime have created the conditions that have enabled the industry to thrive.
A stable regulatory environment has delivered investment because as Green Investment Group head of policy Graham Meeks noted, CfDs created volume, price certainty and stable revenue and enabled offshore wind to access a huge pool of capital. And the cost of that capital has fallen.
But so much for the last several years. Times are changing, and offshore wind is quickly transitioning away from subsidies of the type in CfDs to a subsidy-free, merchant risk future when the wholesale price of electricity will play a growing role.
Will investors provide the same level of support for merchant risk projects? How will the cost of capital play out? How can we provide the same sort of security over revenues going forward? Merchant offshore wind is a “different proposition,” SSE director of development Mike Seaton told the forum.
CfDs came into existence in 2013 as a result of the Electricity Market Reform (EMR). They have played a huge role enabling cost reduction in the industry, so much so that targets were met four years ahead of schedule and the last auction saw clearing prices of £57.50 (US$76.10)/MWh.
As Energy UK pointed out in May 2018, established technologies such as onshore wind have reached a point where strike prices are approaching current wholesale prices. Offshore wind is heading in the same direction, but wholesale market revenues under a subsidy-free, merchant approach are far riskier.
CfDs have been a huge success. Now, with the five-year review of EMR underway what is needed is not subsidies as such. All forms of energy are subsidised in some sense, of course, but what is required, speakers and delegates at the Westminster forum agreed, is another form of revenue stabilisation or intervention, maybe a floor price for low-carbon generation, as suggested previously, rather than subsidisation. And as argued, renewables also need access to the capacity market and other segments of the market.
A ‘revenue stabilisation’ CfD could help derisk investment and reduce the cost of capital. An equally well-crafted 'CfD 2.0' could provide just the kind of stable, enduring regulatory regime that is required.