UK shifts renewables subsidies offshore

Change in direction in UK wind subsidies?

The BBC reported this morning an interesting development in UK energy policy. The UK government is set to shift its subsidies for renewable energy towards offshore wind, with support for solar power and onshore wind being cut. From 2015 the fixed prices for offshore wind will be higher, in the hope of driving investment.

While this seems to be a UK only issue, as we have noted at length before, much of UK energy policy (especially on renewables) ultimately comes back to the EU’s overarching targets.

Why not an overall cut?
As is immediately clear, this does not increase renewable subsidies but it also does not cut them, it is as has been noted, a “rebalancing”. The main reason for this is that the UK still needs to meet its EU mandated target for 2020 of 15% of energy, and 30% of electricity, from renewables. If it has any hope of doing so, a cut in subsidies seems impossible.

Why offshore wind?
Given the size of the jump in electricity production needed (currently just over 11% is produced by renewables) offshore wind is the only realistic option. Solar is unlikely to ever be viable as a key source of electricity production due to the UK’s climate, while onshore wind is severely limited by the lack of viable sites which both provide enough wind and are politically acceptable.

Will this have any significant impact?

• As noted above, this is mostly shifting around funding, albeit to possibility more realistic areas. That said, it remains incredibly uncertain whether offshore wind can deliver the level of electricity needed to meet the UK’s demand.
• Firstly, the costs of offshore wind look set to increase, this is because the wind farms are increasing in size meaning they need to shift to deeper water. Clearly, this means increased costs in terms of installation and maintenance (as well as some very serious technical challenges to be overcome). It will also increase costs of linking the farms back into the UK’s power grid. The working assumption from the government’s side, is that these costs and challenges will be offset by higher output due to more wind at the deeper locations, but there is little evidence to support this so far. Added to that increasing the subsidy at this point seems to imply that the costs of offshore wind will remain stubbornly high raising further questions about its long-term sustainability.
• Secondly, given the intermittent and uncertain nature of wind, the UK will need to install significant extra capacity as well as a huge standby energy reserve to ensure peak demand can be met. This will increase costs across the board.
• The hope is that these new higher prices will help drive investment into offshore wind. While action is necessary, it once again highlights that investment is lagging behind where it should be in the UK's vital renewable technology. It also adds to the growing anecdotal evidence that there are serious issues with attracting investment into the UK's energy market, at least under terms which don't involve higher fixed prices (see Hinkley Point C deal).
• The deal also does not bode well for the hopes of declining energy prices and bills in the future. It essentially locks in a price of £140 per MWh under offshore wind. This remains well above market prices for fossil fuels (its around £70 - £80 per MWh for gas) and keeps the price well above the target of £100 per MWh laid out under recent government studies. Any decrease in costs in the future is unlikely to filter through to prices. 

The key point here is that the UK government is trying to respond to the changing circumstances and changing public opinion, however, it remains locked into a very restrictive framework due to the targets agreed at the EU level. As we have said before, we can’t help but feel that as long as this is the case the UK’s energy woes, both in terms of prices and supply, will continue.