Investor certainty is essential to build a strong UK offshore wind sector

Windmills closer, horizontalThis post is by Green Alliance’s director Matthew Spencer and senior policy adviser Rachel Cary. A version was first published in The House magazine.

Building an offshore electricity network may be the biggest infrastructure project the UK has seen since the building of the railways. It will transport 15% of the UK’s electricity supply within a few years and, in the longer term, will connect the UK, Germany and the Netherlands in a new North Sea grid. The commercial framework designed to stimulate the building of this network (OFTO) has just been subject to a highly critical report by the Public Accounts Committee.

The committee concluded that the first four OFTO licences were bad value for money for a number of reasons including:

  1. Revenues are fixed for 20 years without review, regardless of whether assets are being fully used.
  2. The penalties for not delivering are considered to be too low – they are limited to 10% of expected revenues in any one year.
  3. Any profits from refinancing on better terms are kept by the OFTO and not shared with government.

Taken in isolation these sound like fundamental concerns and, indeed, the UK could have chosen a much simpler system in which National Grid builds and operates the system. But it didn’t. It chose a system designed to encourage competition and the paradox is that, within the OFTO framework, the committee’s recommendations are actually likely to increase costs to consumers. Perceiving higher political risk, investors will raise the cost of capital. This illustrates a common problem for policy makers: the trade-off between flexibility for government and certainty for investors. The current system is weighted to investor certainty, but this is deliberate. Investors are not yet used to financing the offshore grid and are nervous about the risks.  The case for increasing regulator flexibility will be stronger once we have a more mature market, but to do it now would risk stalling the programme.

Unfortunately the committee’s report does not take the early stage of the construction cycle into account, and neither does it follow through its own logic by proposing an alternative regime.  UK infrastructure procurement could be smarter, but fundamentally changing the model at this point is not a wise choice. The good news is that the early UK investment is stimulating a strong offshore wind industry, and we are already generating more power at sea than any other nation on earth.

About Green Alliance blog

Green Alliance is a charity and independent think tank focused on ambitious leadership and increased political support for environmental solutions in the UK. This blog provides space for commentary and analysis around environmental politics and policy issues as they affect the UK. The views of external contributors do not necessarily represent those of Green Alliance.
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2 Responses to Investor certainty is essential to build a strong UK offshore wind sector

  1. Stuart Cochrane says:

    Rachel,

    We met briefly at the Feeding Renewables Conference at Birmingham University last week. Whilst we are doing quite well as a nation in developing our offshore wind resources, the reality is we are going to get nowhere near the required 18GW installed capacity to meet our “legally binding” 2020 obligations. Do you believe that there is potentially a growing realisation that “the market” for offshore wind power is unlikely to react quickly enough to meet government targets and that this is enforced by the UK government’s agreement in principle to purchase onshore wind generated electricity from Ireland?

  2. Rachel Cary says:

    The UK is miles ahead of other countries in its deployment of offshore wind though I agree there’s no room for complacency and with under 3GW installed capacity we’ve got a way to go to get to 18GW. There are concerns that the Electricity Market Reform process could result in an investment hiatus with developers waiting to see what the new contracts will look like and the process needs to be successfully wrapped up this year. Without longer term certainty post 2020 however we may not get the levels of investment needed nor enable a UK supply chain to develop – that’s why we’re asking for a 2030 decarbonisation target in the Energy Bill. I would have thought that greater interconnection with Ireland must be mutually beneficial – not least to help with balancing – though I’m not sure whether it should lead us to significantly revise our ambitions for wind deployment here as we’d miss out on the significant economic opportunities associated with building up our domestic wind industry.

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