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UK Policy for Offshore Development: Attracting investments to decarbonise the economy [free access]

October 1, 2013

The UK government is in the process of creating a strong policy and regulatory framework to ensure its targeted transition to a decarbonised economy by 2050 is smooth. Under the Climate Change Act 2008, the UK government has committed to an ambitious, legally binding target to reduce greenhouse gas emissions by 34 per cent by 2020 and 80 per cent by 2050, taking 1990 as the base year. It is also committed to the 2009 EU Renewable Energy Directive target of achieving 15 per cent of energy from renewables by 2020, which translates into about 30 per cent of total electricity generation to be met from such sources by that time. Huge investments are required in offshore wind, which is expected to make a significant contribution to meeting these targets.

 

The UK government unveiled the Offshore Wind Industrial Strategy in August 2013. To strengthen its position in the offshore wind market, the government plans to invest GBP66 million. This is expected to result in the offshore wind industry contributing GPB7 billion to the economy by 2020, according to BVG Associates estimates. This is based on the assumption that an installed capacity of 16 GW will be achieved by end 2020, with 50 per cent of capital expenditure and 85 per cent of operational expenditure being sourced domestically within UK. This strategy is part of the larger policy objective of securing sustainable economic growth through long-term collaboration between the government and industry. So far, 11 key sector strategies have been published.

 

The strategy was announced during the opening of the 270 MW Lincs Wind Farm, developed by a joint venture between UK-based Centrica Energy, Danish DONG Energy and German Siemens Project Ventures. With this commissioning, the country’s wind power capacity increased to over 10 GW. The UK is currently leading globally in terms of offshore wind capacity, which stood at 3.6 GW as of July 2013. The country is making efforts to retain its leadership position by consolidating supply chain manufacturing.

 

To this end, a strategy was developed in partnership with the newly formed Offshore Wind Industry Council (OWIC), which will also be responsible for its implementation. The key features of the strategy include an investment of GBP20 million from the Regional Growth Fund to improve the offshore wind industry’s supply chain and its competitiveness. Further, another GBP46 million in funding will be extended over five years to the Offshore Renewable Energy Catapult Centre to promote collaboration between industry, government and academia, and to help innovative companies in commercialising their products.

 

UK Trade and Investment (UKTI), a UK government department, will establish a new Offshore Wind Investment Organisation to attract investment and support UK exports. Initiatives will be taken to encourage sharing of information on procurement timelines and key contracting milestones by the developers with their suppliers in the supply chain.

 

The scope of the Department of Energy and Climate Change’s (DECC) offshore wind manufacturing funding scheme will be extended to aid port and coastal infrastructure development in sites securing manufacturing investment. Further, the Department for Business, Innovation and Skills will focus on delivering industrial growth.

 

A proposal has been put forward that requires offshore wind farm developers with projects above a specific size to submit a supply chain plan to become eligible to apply for a Contract of Difference (CfD) (which is a long-term contract to provide price support for developers of low carbon energy projects).

 

The strategy announcement is in continuation of the government's attempts to secure investment in the renewables sector. Earlier in June 2013, the DECC announced the draft strike prices for renewable technologies to give greater clarity about the prices likely to be offered under the CfD, which is a part of the Electricity Market Reform (EMR). The EMR itself promises to offer the industry guaranteed price support up to 2030. For now, the draft strike price for onshore wind projects up to 2016-17 has been set at GBP100 per MWh, which will then fall to GBP95 per MWh for the next two years. The strike price for offshore wind projects will be GBP155 per MWh in 2014-15, declining to GBP135 per MWh in 2018-19.

 

In July 2013, the government published the draft EMR Delivery Plan for consultation, which details the methodology and analysis that provided the basis for the draft CfD strike prices. Subsequent to the consultation, confirmed strike prices will be published in the final Delivery Plan due in December 2013 (subject to Royal Assent of the Energy Bill).

 

With the EMR, the country claims to be the first in the world to give funding clarity up till 2021, visibility of prices till 2018-19 as well as price certainty to projects awarded a CfD and a legally binding emissions target. It is, however, crucial that the Energy Bill becomes a law by the end of 2013. Meanwhile, the government is also reaching out to the developers to ensure that the investment decisions remain intact as per the time schedule during the transition from the Renewable Obligation regime to the new CfD regime under the Energy Bill.

 

With regard to funding, the UK carbon budgets have provided the certainty the industry looks for while taking investment decisions. So far, four such budgets have been approved and the fifth carbon budget covering the 2028-32 period is expected to be in place by 2016. Alongside, the new Green Investment Bank (GIB) has been established, which aims to invest over GBP1 billion in offshore wind (one of its priority sectors) by March 2015. This forms a significant proportion of its government financed GBP3.8 billion capital.

 

While the government, on its part, is doing much to ensure that the right policy signals are given out to renewable energy investors, there are several challenges ahead. These include increasing the visibility of the pipeline of future projects and the likely size of future market demand, particularly after 2020. The local manufacturers have expressed concerns over the danger of the UK government creating a subsidised market for overseas manufacturers.

 

Another concern has been the recent development in June 2013 where the UK Parliament voted down an amendment to the Energy Bill to create a new target to decarbonise the power sector by 2030. The decision on the enactment of the target has been postponed till 2016 or until after the Committee on Climate Change issues an advice. The industry has argued that setting such a target strongly demonstrates the government’s seriousness about backing renewables.

 

Notwithstanding these challenges, the recent initiatives are expected to have a positive impact on investments in the offshore wind industry for the large part. This augurs well for the country’s efforts to decarbonise its economy in the long run.