As part of an effort to curb energy costs, wind farm operators will no longer be allowed to retain excessive profits through a revision of subsidy regulations.
The government has eliminated a loophole that permitted turbine operators to manipulate green energy agreements to exploit surging electricity prices. Despite concerns from developers regarding escalating expenses that may jeopardize efforts to achieve net zero emissions by 2050, this measure has been implemented.
Typically, most offshore wind projects in the UK are constructed with the aid of government contracts that ensure a predetermined revenue, which justifies the cost of constructing and operating the turbines.
Michael Chesser, the economics and markets manager at RenewableUK, a trade group, stated that “at a time when developers are already having to deal with massive global increases in costs, this step will put further pressure on the viability of renewable energy projects.”
Developers participating in this initiative establish a set cost with the government for every unit of electricity produced during the first 15 years of the wind farm’s operation. If the wholesale price in the market happens to be lower than the agreed-upon rate, the government compensates developers for the disparity through a fee incorporated into consumer bills.
In the event that the market wholesale price surpasses the predetermined cost, the developer is obligated to reimburse the difference. However, this framework was formulated years prior to the recent surge in electricity prices. Wholesale prices have escalated to the point where developers can generate substantial short-term profits even in the absence of taxpayer support. Consequently, some developers have been invoking a clause in their contracts that enables them to delay the implementation of the pricing arrangement, such as in instances where construction has been postponed.
The government is currently altering the regulations to prohibit developers from postponing the start of their contract for “commercial gain.” In documentation published on Wednesday, the government acknowledged that these adjustments are being made in a difficult economic climate.
“Our aim with these adjustments is to ensure timely commencement of contracts for generators who have already begun commercial operations.”
The UK is facing pressure from the US, as President Joe Biden has introduced a $430bn package of tax breaks and support for green industries, leading to concerns that investors may opt for the US over the UK.
Orsted, which is developing the Hornsea 3 wind farm off the Norfolk coast, expressed disappointment with the lack of industry support in the Chancellor’s Budget.
The price agreed with offshore wind developers has decreased significantly in recent years, from around £120 per MWh in 2015 to £37.50 per MWh in the latest round last year. However, experts predict that the government will need to factor in increasing costs in an upcoming auction for new government contracts, which could potentially drive up prices.
Jamie Maule, a research analyst at Cornwall Insight, warned that if the high cost of capital cannot be compensated with an increase in return, there may not be enough funds for renewable projects to succeed, potentially stifling competition and discouraging investors and developers from bidding.
“If the next auction fails to factor in rising costs, there is a significant risk of failing to maximize the clean energy capacity we can secure,” warned Mr Chesser, Renewable UK’s representative.
Last year, wind turbines on land and in the sea supplied nearly 27% of Britain’s electricity, while gas and nuclear energy accounted for 39% and 16%, respectively. The government aims to boost the number of offshore wind turbines rapidly by the end of the decade to reduce carbon emissions.
Energy UK, a trade group, believes that the capital allowances in yesterday’s budget are inadequate. The group called on the government to address growing concerns about rising costs, supply chain difficulties, poorly designed windfall taxes, and planning and infrastructure delays that could threaten the billions of pounds of investment needed for low-carbon generation buildout.”
