Bloomberg News

U.K. Boosts Gas While Cutting Support for Wind, Biomass

July 25, 2012

The U.K. government granted tax relief for natural gas drillers and cut subsidies for renewable energy, signaling more reductions in the months ahead as it balances demand for cheaper power against a goal to lower pollution from fossil fuels.

The Department of Energy and Climate Change cut subsidies for onshore wind 10 percent, offered less financial support than expected for biomass and said it may cut solar further. Drax Group Plc (DRX), owner of the U.K.’s largest power station and biomass consumer, fell by a record. Gas drillers get a tax credit worth 500 million pounds ($776 million).

The decision caps weeks of debate within Prime Minister David Cameron’s coalition government over the scale of support for renewables after Conservatives called for a 25 percent cut in the wind subsidy. The Renewable Energy Association said it’s concerned the government’s decision to review wind and solar support levels will hold back investment.

“There are some disappointments,” said Gaynor Hartnell, chief executive officer of the REA. “Wind developers have been prepared for this modest reduction. There is good news for hydro and gasification. However, we are effectively left with no deep geothermal industry” and a “further review for onshore wind.”

Drax Plunge

Drax fell as much as 25 percent after the government outlined new rates for firing power plants with both coal and biomass that were lower than proposals made last year. DECC said it would grant as little as 0.6 of a ROC per megawatt-hour of power produced by plants co-fired with both coal and enhanced biomass, below the 1 ROC proposed in October.

Centrica Plc (CNA), the U.K.’s biggest residential energy supplier, said the tax relief on gas drilling would bolster its Cygnus project in the North Sea, underpinning 1.4 billion pounds of investment in developing a field that will create 4,000 jobs.

Today’s government decision balances demands of Chancellor of the Exchequer George Osborne against those of Energy Secretary Ed Davey. Osborne wants to natural gas remains central to U.K. energy supply and that subsides are limited to keep energy affordable during the recession. Davey’s ambition to boost clean energy to meet 15 percent of the U.K.’s energy need by 2020 from about 3.8 percent.

Davey vs Osborne

Osborne, a Conservative seeking to shore up his chances of becoming Cameron’s eventual successor, has sided with members of his party who represent rural constituencies opposed to wind farms. He won Davey’s support for a review of gas policies later this year aimed at underpinning investment in the industry.

Davey, a Liberal Democrat, held the cuts for onshore wind below the 25 percent sought by Conservatives. DECC forecasts the changes will lead to as much as 25 billion pounds of investment in clean energy between 2013 and 2017 while shaving 6 pounds off the average power bill. The program compels generators to derive a proportion of their electricity from clean sources.

“The support we’re setting out today will unlock investment decisions, help ensure that rapid growth in renewable energy continues and shows the key role of renewables for our energy security,” Davey said in a statement released by his department in London today. “Renewable energy will create a multi-billion pound boom.”

Gas Strategy

The Treasury said the government will publish a strategy later this year on ensuring drillers get long-term commitments on tax incentives for tapping natural gas fields. The 500 million pound tax allowance announced today is designed to spur investment in large gas fields in shallow waters.

“Gas is the single biggest source of energy in the U.K.,” Osborne said in a statement. “The government is signaling its long-term commitment to the role it can play in delivering a stable, secure and low carbon energy mix.”

Electricity generators will receive 0.9 tradable Renewable Obligation Certificates, or ROCs, for every megawatt-hour of power from onshore wind from April, down from 1 at present, the department said. That level is guaranteed until 2014. The department warned “it could change after then if there is a significant change in generation costs”, raising the possibility of a further review of support levels.

Subsidy Mechanisms

The ROCs program along with feed-in tariffs granting above market rates for renewable energy are the two main ways the government supports renewable energy. The subsidies are paid for by consumers through their electric bills, and incentives have triggered a surge in installations across technologies from solar photovoltaics to wind farms both onshore and at sea.

The government also plans to put a 5-megawatt floor on the size of wind projects that can claim ROCs, a decision that will force smaller projects to claim feed in tariffs instead, Gordon Edge, policy director at the lobby group RenewableUK said in a phone interview. With 400 megawatts of projects under 5 megawatts in development or in planning, that will trigger automatic cuts in the tariffs once pre-ordained levels of capacity have been reached, he said.

Wind developers are concerned toay’s announcement means they’ll be “going through review after review” when financiers need longer-term visibility of the system for taxation and support, said Gordon MacDougall, chief operating officer at the developer Renewable Energy Systems Ltd.

Wave and Solar

Support for offshore wind will be cut by 5 percent from 2015, with a further reduction the following year. Dong Energy A/S, a Danish utility that’s one of the biggest U.K. offwind developers, praised the government’s decision saying support is vital for its projects.

DECC more than doubled support for wave power and tidal stream power to 5 ROCs from 2 ROCs and set a maximum project size of 30 megawatts. It said it will consult again on levels for solar photovoltaic panels, a technology it has sought to slow under a different subsidy program for small-scale projects.

Four new categories of biomass burning were introduced, including biomass conversion, which will receive 1 ROC. Biomass conversion with combined heat and power will get 1.5 ROCs and enhanced co-firing of biomass will get 0.6 to 0.7 ROCS from next year, depending on the fuel mix.

‘Limbo Land’

On solar, the department didn’t approve its proposal last year calling for the current level of support to be maintained for now and subjected to a new consultation. New evidence shows that the cost of photovoltaic energy has fallen “dramatically” so extending the current two ROCs for each megawatt hour beyond next March would “over-reward” the technology, it said in the report.

The government said the support, which targets large-scale solar plants, should be set at a “significantly” lower level consistent with feed-in tariffs, the premium rates for small- scale projects. DECC will publish a consultation on the proposals for reduced ROC support shortly, it said.

“The last thing this industry needs is yet another consultation on support levels,” said Seb Berry, head of public affairs for Solarcentury, a British panel installer. “Investors are now in limbo land awaiting yet another consultation and unable to commit to projects beyond March 2013.”

To contact the reporters on this story: Alex Morales in London at amorales2@bloomberg.net; Sally Bakewell in London at sbakewell1@bloomberg.net

To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net


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