Warnings over lower renewables investment as Government announces £200m support

The Government might fail to secure as much investment in renewable energy as it hopes this summer, experts have warned as costs soared.

Ministers on Thursday said that they would allow companies to bid for £205 million in support in an upcoming renewables auction.

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

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

This gives developers the certainty that they need to fork out major upfront costs by making them immune to big drops in electricity costs.

But in the last year it has also benefited customers because the fixed costs that wind producers have been getting have been lower than the market price of electricity.

However the era of ultra-cheap wind power might be dealt a blow this summer when bids open for the next auction.

Last year several developers agreed to build wind farms against a promise they would be paid £37.35 per megawatt hour (MWh) that the sites produced.

This price was so cheap it would have been competitive with electricity produced in gas power plants even before gas prices soared in recent years.

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

Experts have warned that developers might struggle to offer such low prices this time around as they deal with soaring costs for materials and the staff needed to put up the wind turbines.

Data from Cornwall Insight – a research outfit – suggested on Thursday that rising inflation and interest rates, problems in the supply chain and labour shortages have increased the cost of capital by around 4% since early 2021.

“Developers are becoming increasingly concerned about bidding for projects in the next round of the Government’s Contracts for Difference renewables subsidy scheme, fearing they may not get a return on any investments they make,” the experts said.

The Government on Thursday said that offshore wind projects that bid for contracts this summer will not be allowed to charge more than £44 per MWh, down from £46 last year.

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

A further £35 million will cover emerging technology such as geothermal energy and floating wind turbines and £10 million for tidal stream technology.

Energy security and net zero minister Graham Stuart said: “Our flagship Contracts for Difference scheme is already delivering clean, homegrown energy as well as growing a green economy with green jobs.

“Today’s Budget announcement, the move to annual auctions and continued investment in renewable energy will limit the impact of events like (Russian President Vladimir) Putin’s illegal war in Ukraine and drive our overriding priority for the UK to have amongst the cheapest wholesale electricity prices in Europe.

“I am excited to see the opportunities that will open for Britain’s world-class renewable industries as annual auctions kick off this year, enhancing the UK’s reputation as among the most attractive places to invest in for a secure, affordable and prosperous future.”

Trade bodies also warned that the Government had not taken into account the changing circumstances that are facing renewable energy developers.

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

“At a time when the US and EU are bending over backwards to offer incentives for 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 putting its own targets in jeopardy if it doesn’t adapt the scheme to recognise the realities of building new renewables projects amidst rising costs and increased international competition.”