LONDON: Gerard Wynn
Monday 16 July 2012
Last Update 16 July 2012 2:18 pm
LONDON: As governments pare subsidies for renewable and other energy they must make the outlook for future public support clearer, if they are to avoid an investor retreat.
Investors will consider both the level of support and its prospects for stability when deciding whether to back an energy project.
The trouble is that recent policy changes have seen both subsidy cuts and a lack of predictability over future support.
The British government is a case in point.
It has delayed a decision on wind power cuts until the last possible moment, now expected in the next few days before Parliament breaks for its summer recess.
The delay may stem from a messy halving in solar support, which the government had to postpone by several months after courts ruled it had been too hasty.
The government is clearly trying to get it right for wind, when it announces small cuts shortly.
The trouble is that the latest wind support cut only applies to a scheme which will be phased out for new projects in 2017, with no clarity yet on the program replacing it.
That larger electricity market reform (EMR) is dragging on, with details still unpublished on electricity support prices for everything from gas, nuclear, coal with carbon capture and storage, as well as renewables.
The shake-up in British renewable and other energy policy support follows similar cuts in countries around the world, from Germany to Italy and the US, as green technologies become cheaper and more competitive and less in need of support.
Italy announced last Friday annual caps in support for new renewable energy projects.
Investors had complained about months of delays before the announcement, and now see added bureaucracy as well subsidy cuts under the new scheme which may see foreign firms pull out.
Uncertainty and chopping and changing means investors apply a bigger risk discount to renewable energy projects.
It might achieve better value for public money if governments paid less money in subsidies, but communicated these more clearly, further in advance, and did not change them again unless according to a previously announced schedule.
The size of the planned cut in British onshore wind subsidy is not that important: it is proposed at a tenth of the present support, or roughly a twentieth of the full market price for wind power.
The coalition government is trying to find a balance between Conservative party skeptics who oppose turbines on the basis these blot rural landscapes, and green groups who howl at any subsidy cut.
The tariffs at present are too generous and the industry could probably take a bigger hit, perhaps to 0.75 of a tradable renewable obligation certificate (ROC) per megawatt hour, from 1 ROC now, and compared with the proposed cut to 0.9 ROC.
What matters more is the outlook for support.
The upcoming electricity market reform will usher in a messy interim for new wind farms from 2014-2017, where they can either earn ROCs at the new rate, or else strike a deal to sell power under a new, so-called contract for difference (CfD) scheme which effectively guarantees an electricity floor price.
The ROC scheme closes to new projects from 2017.
But the CfD strike prices won't be announced until the second half of next year, according to the latest government timeline.
The government is also yet to announce the counterparty which will strike deals with energy projects.
British solar support was double its European neighbours, and the government last year quite sensibly proposed to halve it.
But it tripped up, giving the solar industry just a few weeks notice of the rule change, which courts refused to support, ushering in months of uncertainty which deterred investment.
Wind is more important, accounting for a rapidly growing slice of Britain's power generation, currently at 4 percent of the total (solar is less than 0.2 percent), and will be central to the country's binding 2020 renewable energy targets.
But Britain is in danger of losing investment to other countries, such as Germany on offshore wind, after Berlin finally clarified compensation for developers who fail to get grid connection, while the UK mulls its complex reforms.
— The author is a Reuters market analyst. The views expressed are his own.
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