The offshore wind industry in the UK has endured a good amount of uncertainty in the last few years but has come out of that period with flying colours. Costs have come down, and in November last year, after many months of concern, the government in the UK at last provided clarity on where it stood on the future of offshore wind. In doing so it also helped provide developers with sufficient confidence to invest in the industry, committing itself to three offshore wind auctions by the end of the decade provided the industry met cost reduction targets.
Unfortunately, last week’s decision by voters in the UK to leave the EU is the cause of yet more uncertainty – as it is for every industry in the UK – but perhaps it need not be too great a cause for concern. The offshore wind industry is in a different place now to where it was a couple of years ago, it is stronger, and cost reduction efforts are succeeding. Now it is even being suggested that costs are coming down so quickly that not only will offshore wind be able to compete with gas, but that it can even beat new nuclear.
It is concerning, however, that the next Tory administration in the UK – whoever it is led by, and that is not likely to become clear for 8-10 weeks – could well be more right wing, and less well-disposed to renewables. It is also concerning that, to all intents and purposes, at the moment, HM government is rudderless, with Prime Minister David Cameron resigning and no new ministers to be appointed until the Conservative party elects a new leader. The Labour opposition is in meltdown. It is also suggested that we will have a snap election in the UK when a new leader of the Conservative party is appointed. That means more uncertainty and means that we will have to wait longer for any clarity on policy.
Even that is really only the end of the beginning of the uncertainty: we still won’t know – and won’t know for many months or even years – how exit negotiations with the EU will affect industry in the UK as a whole. Nor do we know whether Scotland will be part of the UK a couple of years from now. Whereas a small majority of voters in England were in favour of Brexit, in Scotland a larger majority wanted to remain part of the EU, and the momentum behind a second vote for independence from the UK is growing.
The Scottish government has always seemed far more strongly committed to renewables than Westminster and in one sense, if Scotland votes to leave the UK it could actually provide a boost for offshore wind, at least north of the border. There is however a real possibility that if Scotland votes to leave the UK, windfarm developers could find themselves faced with two regulatory (environmental) regimes in what was the UK: one still based on EU rules and regulations, the other, south of the border, governed by a new set of rules. It also seems certain that if Scotland leaves the UK, given that it is governments that control the incentive regimes for renewable energy – that is, the level of subsidy provided and the term over which subsidies are extended – that it might one day be more attractive to build offshore windfarms in Scotland than in what remains of the UK.
As Bruce Valpy at BVG Associates noted recently, it is really too early to tell what the implications are for the UK as a whole until after the exit negations, which could take at least two years under Article 50 of the Lisbon Treaty, if Article 50 is actually triggered. Unfortunately, as Mr Valpy points out, and as I have pointed out many times in OWJ, uncertainty has real implications for renewable projects in as much as investors dislike it, and the price demanded for increased risk is increased returns. Moreover, increases in rates of return have a disproportionate effect on cost of energy.
As he noted, the referendum result has already had an immediate and dramatic impact on the value of the pound. Electricity from UK projects is sold in pounds, but much of project capex is in euros, and this introduces more uncertainty, although he also noted that he knows of investors in the UK supply chain that have said the referendum will have no impact on their decisions about setting up in the UK.
Any regulatory impact will depend on the inevitably protracted negotiations. Some EU regulations restrict the number of potential development sites, but on the other hand, the industry is starting to benefit from standardisation of regulations and practices in many areas. Much progress in this area could continue with the UK still in Europe, even if outside the Union, but the rate of progress will probably slow. As in many other industries, EU funds have also provided a much-needed boost to offshore wind R&D, especially as UK offshore wind-specific funding slowed. Current schemes will continue to fund projects, but in the longer-term UK access to money for R&D will be reduced.
“Overall,” said Mr Valpy, “we don’t see any need for knee-jerk responses.” Like him, I feel much more confident now than I would have been a couple of years ago that the offshore wind industry will cope with the challenges that Brexit presents. Even so, uncertainty drains the life blood out of any industry if it goes on too long, which is why industry and business leaders as a whole rue the day Mr Cameron ever decided to hold a referendum.