If George Osborne reduces subsidies for onshore wind, what will it mean for 2020 renewable energy targets?

  • 08 Jun 2012, 15:37
  • Robin Webster

Is the government still committed to its 2020 renewables target? Under EU law, the UK has promised to ramp up energy production from renewables to 15% by 2020 - in 2010 the figure was 3.3%.

But last weekend the front page of the Observer reported that George Osborne and the Treasury are lobbying for a 25% cut in subsidies for onshore wind.

What effect might this have? A study paid for by the Scottish renewables industry suggests that a 25% cut in subsidies could lead to 25% cut in the number of onshore wind projects, with many of those located in Scotland.

Meanwhile, comments by industry experts appear to indicate that the impact could be even more significant as investor confidence is hit.

Osborne's position is widely seen as a supportive response to a back-bench Tory rebellion against wind farms. (Many of those MPs oppose wind farm development because of what they believe will be the impact on the landscape of their constituency.) Predictably, parts of the media were pleased, with the Telegraph calling the proposal "welcome and necessary" and the Mail asking " Is this the end of wind farms?"

If enacted, it seems likely that the move would make it more difficult for the UK to meet its EU renewables target. This is because onshore wind is a key plank of government plans to ramp up renewables - as this chart from DECC's 2009 Renewable Energy Strategy shows (onshore wind is light blue):

Screen Shot 2012-06-08 At 15.22.27

A study commissioned by the Department for Energy and Climate Change (DECC) from the consultancy Arup in 2011 (which fed into DECC's more recent Renewable Energy Roadmap) laid out some different scenarios for the potential future build of onshore wind, illustrated in this graph:

Based on this the government concluded that

"The central range for deployment indicates that onshore wind could contribute up to around 13 GW by 2020."

It's useful to point out however that the three scenarios in the Arup study are based on maximum build rates. As DECC puts it:

"....deployment in each technology would be expected to be correspondingly lower than them, except where RO support is set high enough to incentivise even the most expensive potential renewable projects in a given technology."

In other words, the upper end of the 'central' scenario in the Arup study - which is broadly consistent with the rollout of onshore wind projected in the 2009 Renewable Energy Strategy - is based on modelling which doesn't include any financial constraints. Once some projects start being excluded on the grounds of affordability (or for any other reason), that will makes it more difficult to hit the renewable energy target.

Cutting the Renewables Obligation

The Renewables Obligation (RO) is the (notoriously complicated) way the government encourages large scale renewable power. It is due to be replaced by a new support measure known as Contracts for Difference (CfD) (equally complicated, although in a different way) by 2017 - but before that happens, new levels for the RO need to be set for the 2013-17 period.

Back in October 2011, DECC launched a consultation on the proposed changes to the RO. In it they suggested that the support level for onshore wind be cut by 10% in order to reduce costs. Their modelling indicated that this would reduce build of onshore wind by 0.35-0.43GW.

This isn't a vast amount and at the time, the renewables industry appeared relatively sanguine about what was perceived as a relatively light cut - the Renewable Energy Association, for example, responded that "Onshore wind developers should be able to live with this".

The mooted 25% cut is of course somewhat larger. There isn't much research into what effect it might have. There does however seem to be a lone study from 2011, produced for ScottishPower and ScottishPower Renewables by the consultancy Oxera (so caveat emptor).

The report models which proposed onshore wind projects would become uneconomic under a 10% and (handily) a 25% cut to the RO support mechanism.

It suggests that a 25% cut in the RO support measures would lead to a proportionate 25% reduction in the rollout of onshore wind:

Perhaps of interest to those MPs who oppose expansion of wind farms in their constituency, Oxera predicts that nearly three quarters (72%) of the 8.6TWh of wind projects made uneconomic by the decrease in support would be in Scotland.

Of course, these conclusions come from a report paid for by Scottish companies which are investing heavily in wind power, and there isn't a lot else out there, so bear that in mind.

Less onshore wind might also push up costs. In comments made over the weekend, Tory MP Tim Yeo pointed out that offshore wind is a more expensive option than onshore turbines. The Oxera report calculates that meeting the 2020 renewables target by making up a shortfall from onshore wind with offshore wind could increase costs to the taxpayer by around £219m-£256m per year by 2020. (This calculation assumes the support levels created by the 25% cut to the RO remain the same up to 2020).

Impact on investor confidence

RenewableUK believe that the effects of the cut would be more severe than predicted by the Oxera study, telling us that "investor confidence would be shaken by a 25% cut".

A spokesperson from Bloomberg New Energy Finance seemed to agree that there could be wider implications. They told us

"The biggest point is the uncertainty and the bad impression that is created if the government proposes one level for the RO and some months later it unravels."

They added that the uncertainty created so far has "already affected investor confidence" and may be impacting on onshore wind this year:

"Some investors have agreed plans made on the basis of 0.9 ROCs. If that's not the case those decisions would not have been made. The priority is that the government needs to clarify the situation as soon as possible".

Meanwhile, in a comment sent to us, DECC said

"It is vital that our support for renewable electricity both encourages investment and represents value for money for consumers. The Government will publish support levels for renewable electricity technologies for the period 2013 to 2017 shortly."

...which isn't massively informative.

Of course, there's a political wrangle going on behind the scenes, that is, if you believe the Observer which suggested that there is a massive barney between DECC and the Treasury, with the Treasury "crawling all over" the proposed rates and "demanding" a 25% cut.

Maybe that explains DECC's somewhat vague comment. So, the normal cut and thrust of politics - meanwhile, the renewables target looms just eight years away...

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