The party is almost over. Despite approval for the latest big wind farm plan – ScottishPower has just won consent for a mighty 96-turbine 288MW array at Kilgallioch in the Scottish borders – there is a distinct feeling of the morning after the night before in the UK wind sector.
After 10 years of growth, the UK onshore wind energy business has probably peaked, and attention is now turning to small-scale, single-turbine projects in the UK and the larger prospects of development in Ireland.
That is the view of many in the wind energy sector as the government prepares for complicated energy market reform. They say a change in political climate, the relative scarcity of good available sites, a review of the current funding levels and looming changes in the subsidy regime mean that the days when wind was king of renewable energy could now be behind us.
David Eynon, senior sustainability adviser at Colliers International, says: “The party may be over under the present framework.”
Contracts for difference
Meanwhile, new rules on wind energy procurement and subsidy have caused confusion and have been criticised for their complexity. Introduced under the Energy Bill, they are called “Contracts for difference”.
“Investors are getting tired because of a lack of clarity from investors,” says Eynon. “There is concern that legislation needs to be clarified.”
Last year, Aviva Investors and SachsenFonds completed one of Europe’s largest wind energy deals by acquiring the 49.4MW Almatret wind farm in Spain from Element Power. Aviva says it can cope with the complexity of regulation, but wonders how many others can.
Ian Berry, specialist fund manager at Aviva Investors, talks regularly to the Treasury and the Department of Energy and Climate Change and has told them the new rules are too complicated.
“On the face of it, the contracting for difference rules are surprisingly complicated,” he says. “Why should a new type of investor bother to get into the sector with these rules? If the government wants new investors, it has to make it simpler.”
Berry is also concerned about the level of UK subsidies to wind energy under the renewables obligation funding schemes.
Aviva has yet to buy a completed income-generating wind farm in the UK – Berry blames a lack of suitable opportunities – and is not the kind of investor to risk putting development funding up front.
“It can take five or six years to get a wind farm from idea to completion, and it’s a strange breed of investor who is prepared to take that kind of risk,” says Berry.
Food for thought
With so much uncertainty, and so many crosswinds, the onshore wind sector hardly needs any more to worry about, but events in Spain provide unhappy food for thought.
Faced with a huge deficit in its electricity tariff budget, the Spanish government decided to make retrospective cuts to its subsidy regime. Other European governments, also under pressure to cut spending, could follow suit.
Miles Thomas, head of Savills Energy, says the risk of retrospective subsidy reductions in the UK is the elephant in the room.
“Doors have been left open; the mechanisms exist,” he says. “But to use them would be commercial suicide for the government, which had promised grandfather rights for those who signed up to wind energy under earlier subsidy regimes. The doors to retrospective changes need to be closed. We need to avoid this at all costs.”
Late last year, the UK government moved to reassure investors by announcing a mechanism to help wind farm developers to ‘lock in’ to current feed-in-tariffs (FITs) even if the project has not been built, helping them gain the optimum level of tariff support.
Current wind FITs are fixed until 1 April 2014 – but a review is under way. The Treasury, never keen on giving money away, is pressing for a 25% cut.
But Dane Wilkins, director of renewable energy capital at Jones Lang LaSalle, says changes to the subsidy regime do not need to be destabilising.
“Subsidies for onshore wind are coming down and are forecast to drop by 10% from April this year, with another review imminent,” he says. “A cost review this summer is likely to result in a further subsidy cut of a similar amount kicking in as early as April 2014.
“Subsidies are going down because the cost of building wind farms is going down. Manufacturers are keen to win orders, so are keeping their prices competitive, while the cost of steel and other components has come down substantially. Overall, turbine construction costs are down by 15%.”
Wilkins, and many others, are keen to stress that, despite the current turbulence, the UK’s wind energy sector is not blown out yet.
Eastern breeze
Despite political gyrations about wind subsidies, the turbine is turning steadily at Pyewipe Farm.
Regardless of the season, a chill wind blows reliably along England’s east coast and Pyewipe, near Goole, East Yorkshire, is well placed to catch it.
Arable farmer Paul Strawson installed the 500kW single turbine in September 2012. Taking up only half an acre of his 1,000-acre property, the turbine promises useful and reliable income diversification and helps to offset the farm’s electricity costs.
This summer, the turbine’s first in operation, will be an important test of its year-round earning capacity.
“We are guaranteed a feed-in tariff for 20 years,” says Strawson. “It took two years to get this built and through planning. We had lots of hoops to jump through. This summer will be an interesting test. But for now, the turbine is turning.”
Mark Newton, partner at surveyor Fisher German and an adviser to the National Farmers Union, says landowners are increasingly turning to small-scale wind power to diversify their income.
“Returns depend on wind speeds, but for 2MW capacity today, you’d be looking at £20,000-£30,000 per turbine per year – and that is perhaps 10-20% more than five years ago,” he says.
“Landlords are looking at potentially a 15% return on investment and 100% tax relief on construction costs, which is definitely appealing.”
Fisher German says the planning approval rate for wind projects is very good, with 82% of applications for smaller turbines (between 5kW and 50kW) approved at local level.
Headwinds
Political headwinds are making wind energy seem less appealing.
Last year, a leaked letter revealed that energy minister John Hayes thought wind energy was “extremely inefficient and costly”, a view that mirrored growing concerns among backbenchers and campaigns by Conservative-supporting newspapers.
Also, the Treasury is pressing for heavy cuts in wind farm subsidies.
Ill winds
Some wind turbines could have shorter lives than the 20-25 years many investors rely on.
Last December, the Renewable Energy Foundation published data showing that the economic life of some onshore wind turbines is between 10 and 15 years. It blamed wear and tear.
Colliers’ David Eynon says: “Inevitably, that changes the maths of their investments, and it is something investors won’t like to hear.”
West winds
Could Ireland be the next big growth area for wind energy?
Last month, UK energy and climate change secretary Edward Davey and his Irish counterpart, Pat Rabbitte, agreed to explore a new trade in renewable energy. About 3,000MW of development is being discussed.
The next stage would be sign a treaty in 2014, with wind energy exports from Ireland to the UK starting by 2020.
Contracting for difference
Contracting for difference (CfD) is the cornerstone of the electricity market reform contained in the Energy Bill.
The complex new system is intended to help fund £110bn of energy infrastructure after 2017.
The 15-year contracts are agreements between electricity generators and a government counterparty.
Natasha Luther-Jones, partner in DLA Piper’s projects team, says the government has learned lessons from other complex contracts, such as the private finance initiative (PFI).
“It remains to be seen whether developers will want to seek further comfort from the government on the counterparty’s credit and recourse to government,” she says.
“Investors will be eager to review the extent of protection from change of law/regulation offered under the ‘sharing’ approach taken by the government, which appears to have been heavily influenced by the approach with PFI.”
A final draft of the CfD terms is expected to be published in July.
