HM Insights

A Power Struggle – despite its successes, Scotland’s renewable energy sector is under siege

What a difference a year makes! When I wrote my renewable energy review last year, we had just seen the results of the Scottish referendum and the first Contracts for Difference (CfD) auction under Electricity Market Reform, were aware of the then UK government’s interest in new nuclear and shale gas and were anticipating a glut of renewable projects trying to push through to generation prior to the end of the Renewables Obligation (RO) n March 2017.

Somewhat ominously, I highlighted that while the Scottish government (who had declared themselves against new nuclear and fracking for shale gas) had the power to grant planning consent for renewable developments, it was the UK government who held the purse-strings and who therefore had the power to award large parts of the budget monies to nuclear and frustrate the development of onshore wind by limiting the CfDs awarded, post the end of the RO in March 2017.

I concluded by saying that the future of the renewables industry in Scotland was dependent on at least three key issues – would any more energy powers be devolved to Scotland following the Smith Commission Report; what would happen at the UK General Election and, if all else fails, will England need Scottish electricity to keep the lights on?

While these three issues were of prime importance, very few would have predicted the assault on future renewable developments that has taken place since 18 June 2015.

While one might have thought that the polarizing nature of the General Election result could have led to further devolved energy powers or an opportunity for Scotland to continue its support for renewables while middle-England reined back, that was far from the case.

RO bombshell starts the onslaught

The Conservative Party manifesto had said that “we will end any new public subsidy” for onshore wind development.

Pushed on by the Treasury, the new Energy Minister interpreted this as giving her the power to announce that the RO would close a year early for onshore wind. The House of Lords rejected this provision in the Energy Bill and sent it back to the Commons, refuting claims that the Lords had acted against the Salisbury convention (which says the Lords will not oppose bills which implement manifesto commitments) by saying that the commitment was to end new subsidy, not existing subsidy. At the time of writing the Commons` response is awaited but it is likely that the Lords will be successful in forcing some key changes to the Bill, to allow certain projects a grace period to 31 March 2017 to commence generation.

The Energy Minister followed up the RO bombshell by suggesting in Parliament on 24 June that onshore wind may be removed from the CfD process. The Chancellor then weighed in by including in his 8 July Budget a provision that renewable energy producers would now pay the Climate Change Levy tax. Further announcements removed benefits fossil fuelled power stations had when converting to biomass; started consultation on removing from 31 March 2016 (a year earlier than previously proposed) the subsidy large solar installations of less than five megawatts enjoyed; proposed changing the rules on Feed-in Tariff schemes so developers would not know what they would be paid for their energy before they spent considerable sums and started construction; and indicated that the anticipated announcement on the next round of competitive auctions under CfD would be delayed until the autumn of 2015 – and we are still waiting.

The five-year review of the Feed-in Tariff scheme was announced on 27 August with severe cuts to the payment rates being proposed, some by up to 87% , with a view to closing the scheme in 2018-19. And, most recently, in the later stages of the 2015 finance bill it emerged that the government plans to cut tax reliefs available to investors in community energy schemes.

These steps mainly affect electricity but developing energy from heat did not escape – funding is currently only committed to end-March 2016.

The first casualties

Not surprisingly, in addition to an unprecedented backlash and lobbying against these measures from the renewables industry, the suddenness and scale of the proposed changes and the uncertainty created took its toll. Two of the major players in the wave industry, Pelamis and Aquamarine, went into administration. Drax announced it would not be continuing with the proposed development of its carbon capture and storage plant in Yorkshire. The UK fell out for the first time of the Ernst & Young Renewable Energy Country Attractiveness index top ten. More than 1,000 people in the solar industry have apparently lost their jobs with at least two large firms collapsing and possibly more to come.

Many investors pulled back from committing to UK projects and we have seen many examples of projects no longer proceeding as developers either walk away from sites that were at pre-planning consent stage of development or reduce the commercial terms on offer so that landowners pull out of the deal.

The UK government`s mantra has been to keep down costs, increase energy security and tackle climate change. While the need to contain electricity bills is well understood, the policies seem to concentrate solely on this element – cheap gas and expensive nuclear apparently being the answer to the other two legs of the ‘energy trilemma`.

We now face the possibility of Scotland, historically a net exporter of electricity, having to import electricity unless major new developments come on board. We have known for some time that the major coal fired power stations at Cockenzie and Longannet were due to close while the nuclear plants at Torness and Hunterston B are currently only running to 2023. It was hoped that renewable developments in various forms would help make up the shortfall but that was based on continuous development, not savage cutbacks which threaten to bring the renewables industry to its knees.

The home front stays strong

And yet, renewables had continued to make considerable progress in 2015. Figures for 2014 showed that Scotland displaced over 12 million tonnes of carbon emissions, up 120% on the figures from 2010, demonstrating that renewable schemes were now saving more than one million tones per month of CO2 from entering the atmosphere.

For the quarter to June 2015, renewables for the first time surpassed coal in supplying the UK`s electricity – gas powered plants providing the most electricity at 30% followed by renewables at 25%,, nuclear at 21.5% and coal at 20.5%. In August the extent to which Scotland has embraced small-scale renewables was revealed with figures from Scottish Renewables showing that around 42,000 solar schemes, 2,557 small wind projects, 204 hydro schemes and three anaerobic digestors were powering Scotland`s homes, businesses and community buildings.

In October it was announced that Scotland had hits its community energy target – 500 megawatts of community energy – 5 years earlier than the aimed-for 2020 date. In the same month, Bloomberg Energy Finance reported, using a levelised cost of energy analysis to iron out the differences between different technologies, that onshore wind farms are now the cheapest way for a power company to produce electricity in Britain.

It was also announced that renewable heat generation had increased by 36% over the last year in Scotland, although still well below target figures. The Scottish government, through Wave Energy Scotland (WES), announced in November 2015 that they were to award over £2.25m of funding to eight novel wave energy projects to help encourage their development and the Scottish government has also supported the solar industry in a way which isn`t applicable south of the Border.

What does all this mean for those involved in Scotland’s renewables industry, including lawyers?

There is still plenty of short-term work. For those onshore wind projects which can achieve the March 2016 RO deadline or March 2017 grace period deadline, it’s full steam ahead to try and ensure generation is achieved. Failure to do so will have severe financial consequences. Hydro work still continues, particularly for the pre-accredited schemes. Tidal energy is developing and, although wave energy remains challenging, WES is still supporting it. There is also hope that a future CfD round might allow one more Scottish off-shore wind project to obtain sufficient subsidy to allow it to proceed.

Looking further ahead, a great deal depends on what can be built in a subsidy-free world. Major developers, with the deeper pockets, will still hope that development can continue, albeit on the most efficient terms. For onshore wind, this is going to require turbine prices to come down and also for the planning system to permit taller and more powerful turbines to capture as much wind resource as possible. We are not far away from repowering the earliest turbines built in Scotland and the size of the replacements will be an important debate.

It also depends on whether there will be any concessions, in the final CfD arrangements, for community renewables or for development on our islands. Will onshore wind on Shetland, Orkney and the Western Isles (notwithstanding there is a large grid issue to deal with) be permitted to qualify for CfD if other onshore wind is kept out or will this fall foul of state aid rules?

But, leaving aside further development, it is likely that there will be a growing secondary market as the industry and matures and it is more difficult to find new sites.

It has lost the battle, but can renewables still win the war?

Although lobbying against these proposals has been considerable, actual results have been limited. Where this all goes is still hard to predict. Many think that the UK government is deliberately trying to halt the advance of renewable energy because it offers unwelcome competition to its favoured fossil fuels which, the IMF showed earlier this year, receives the equivalent of £400 per head of population in the UK compared with the £100 per head for subsidizing renewable energy. The UK has to go to the Paris Climate Change conference shortly and try and explain the its policies.

To win the war, renewables may need this government to re-think its energy policy (such as it is) to develop a coherent policy that investors can have confidence in and which will keep the lights on. Failing that a change of government as soon as possible!