Warnings of lower renewable energy investment as Government announce £200m support

Ministers said on Thursday they would allow companies to bid for £205million at an upcoming renewable energy auction.

The so-called Contracts for Difference (CfD) system was introduced in 2015 to encourage companies to invest in new renewable energy.

It is essentially a guarantee that the grid will buy all the electricity produced by a new wind farm at a set price for 15 years.

This gives developers the peace of mind of having to shell out large upfront costs while being immune to large drops in electricity costs.

But last year it also benefited customers because the fixed costs wind producers receive were lower than the market price for electricity.

However, the era of ultra-low-cost wind energy could take a hit this summer when bids open for the next auction.

Last year several developers agreed to build wind farms in return for a promise they would pay £37.35 per megawatt hour (MWh) the sites produced.

This price was so cheap that it would have been competitive with electricity from gas-fired power plants even before gas prices had risen sharply in recent years.

For comparison, the price of electricity on the open market was hovering around £145 per MWh on Thursday.

Experts have warned that developers may struggle to offer such low prices this time as they grapple with rising material and labor costs to erect the wind turbines.

Data from Cornwall Insight – a research institute – on Thursday suggested that rising inflation and interest rates, supply chain problems and labor shortages have pushed up the cost of capital by around 4% since the start of 2021.

“Developers are increasingly concerned about bidding for projects in the next round of the government’s Contracts for Difference renewable energy subsidy program amid fears of not getting a return on the investments they make,” the experts said.

The Government said on Thursday offshore wind projects bidding for contracts this summer cannot charge more than £44 per MWh, up from £46 last year.

It said the funding would be available in two pots, with £170m going to established technologies – which will include offshore wind for the first time.

A further £35m covers new technologies such as geothermal and floating wind turbines and £10m for tidal current technology.

Graham Stuart, Secretary of State for Energy Security and Net Zero, said: “Our flagship Contracts for Difference program is already delivering clean, indigenous energy and growing a green economy with green jobs.

“Today’s budget announcement, move to annual auctions and continued investment in renewable energy will limit the impact of events such as (Russian President Vladimir) Putin’s illegal war in Ukraine and advance our top priority for the UK to get the cheapest wholesale electricity prices belong to Europe.

“I’m excited about the opportunities that will open up for the UK’s world-class renewable energy industry when the annual auctions begin this year, reinforcing the UK’s reputation as one of the most attractive places to invest for a secure, affordable and prosperous future. “

Trade associations also warned that the government had failed to take into account the changing circumstances faced by renewable energy developers.

RenewableUK’s Michael Chesser said: “Unfortunately, given global inflationary pressures, the budget and parameters for this year’s CfD auction are currently too low and too tight to unlock all the potential investment in wind, solar and tidal power projects that the industry could deliver .

“At a time when the US and EU are bending over backwards to incentivize renewable energy developers to come to them to build new projects, the UK is sending the wrong investment signals.”

Energy UK Deputy Director Adam Berman said: “The Government risks jeopardizing its own objectives if it does not adapt the scheme to reflect the realities of building new renewable energy projects amid rising costs and increasing international competition to acknowledge.”