U.K. Grants Offshore Wind Triple Market Electricity Price

The U.K. will pay offshore wind developers triple the market price for electricity they generate under a subsidy program to boost renewable energy that by 2020 will cost consumers 7.6 billion pounds ($11.6 billion) a year.

The Department of Energy also detailed rates paid for solar, hydropower, biomass conversion and onshore wind farms as well as boosting to 3.8 billion pounds the capitalization of its Green Investment Bank. The Treasury will guarantee debts for building a new nuclear station.

The measures are part of an effort by Prime Minister David Cameron to lure 110 billion pounds for new power plants by the end of the decade. Offshore wind and nuclear reactors are at the heart of the plan to replace aging power plants and cut pollution from fossil fuels. The nation’s biggest utilities have yet to pledge enough funding to reduce the risk of blackouts.

“This is another clearing of the fog, but there’s still a huge amount to be resolved,” Paul Massara, chief executive officer of RWE AG’s U.K. Npower unit, said today in an interview in London. “I don’t believe we’re at that stage where there is enough detail to make investment decisions.”

Blackout Risk

The U.K. has an EU target to get 15 percent of all energy for heat, power and transport from renewables. Figures released today showed that in 2012, 4.1 percent of energy came from renewables, and the average for 2011 and 2012, at 3.94 percent, fell short of the EU’s first interim target of 4.04 percent for the two years.

The statistical probability of major power shortages in the U.K. will increase to about once in 12 years in 2015 from once in 47 years now as a result of closing power plants, the energy regulator Ofgem said today in a separate statement. About a fifth of Britain’s power generation capacity is scheduled to close in the next decade, including all except one nuclear plant.

Ministers are seeking to overhaul the current system of renewables obligations placed on utilities to use clean energy and to stimulate investment while keeping a lid on prices paid by consumers. Separately, the government said shale gas fields in northern England are twice as big as previously thought.

Davey’s View

“The combination of the announcements that we’re making will mean that the lights of the country will stay on,” Energy Secretary Ed Davey told delegates today at a conference hosted by The Economist in London.

In a statement, he said a cap on support for low-carbon electricity that suppliers can pass to consumers will start at 4.3 billion pounds for the tax year that begins in April 2015, rising to 7.6 billion pounds in 2020.

The flurry of initiatives overshadowed the first results from the government’s “Green Deal,” which allows consumers to take out subsidized loans to pay for insulation, double-glazing and other efficiency measures. It was the centerpiece of the Cameron’s first energy law. In its first five months of operation, only four of the nation’s 26.9 million households took up the incentive.

The so-called “strike price” earned by offshore wind power plants will be 155 pounds ($237) per megawatt-hour generated starting next year, declining to 135 pounds by 2018, according to Davey’s department. The government estimates that funding will spur construction of 8 gigawatts to 16 gigawatts of turbines at sea.

Strike Prices

Wind farms based on land will get 100 pounds a megawatt-hour, declining to 95 pounds from 2017. Biomass operators receive 105 pounds, large solar 125 pounds and hydroelectric dams 95 pounds a megawatt-hour.

Other strike prices announced include 305 pounds per megawatt-hour for tidal and wave projects, 65 pounds for those that use gas from landfill sites, 90 pounds for energy from burning waste, 125 pounds for geothermal power, 120 pounds for dedicated biomass plants and 145 pounds for anaerobic digesters. The front-month electricity price in the U.K. has averaged 47.80 pounds a megawatt-hour over the past year.

Most of the contracts will last 15 years, while those for plants converted to biomass will get 20-year deals, according to the proposals. Drax Group Plc, the country’s biggest coal plant, is spending $1 billion to convert half of its six units to burn wood pellets. Its shares rose as much as 8.2 percent today.

‘Step Forward’

RenewableUK, the main industry lobby group, said that while the proposals are a “step forward,” the 15-year length of the contracts makes industry development “challenging.”

“The levels of the strike prices are challenging but possible considering the reduced time periods that renewables will be supported for under contract for difference system compared to the Renewable Obligation,” Chief Executive Officer Maria McCaffery said in an e-mailed statement. “More details do need to be set out. The most important ingredient remains investor confidence and that will take time to land.”

Subsidies paid “aim to make the U.K. market one of the most attractive for developers of wind, wave, tidal, solar and other renewables technologies, whilst minimizing the costs to consumers,” Davey said in a statement. He said the goal is for renewables to contribute more than 30 percent of the nation’s electricity by 2020.

The price for offshore wind is within the range of 145 pounds to 175 pounds recommended by the government’s global warming policy adviser, the Committee on Climate Change.

Nuclear Guarantee

In a speech to Parliament today outlining infrastructure spending commitments, Treasury Chief Secretary Danny Alexander slipped in that the Treasury will extend a “multi-billion pound guarantee to advance the new nuclear power station at Hinkley Point. Electricite de France SA is considering whether to build the plant in southwest England, the first facility of its kind in two decades and is still in talks with the government about the strike price.

The government said it will run its first capacity market auctions next year, for delivery in 2018. The purpose of the mechanism is to ensure there is enough generation capacity that can be brought online at times of peak demand.

Existing power plants will receive one-year capacity market contracts, those that require refurbishment to remain operational will receive payments for as many as three years, and new generators will get longer agreements, according to a document posted on the energy department website.

RWE’s Massara said the 15-year span of the contracts for difference for renewable power is too short, and that all power plants should be eligible to contracts of the same duration within the capacity market, rather than the current proposal, which rewards new generators with longer deals.

‘‘The capacity mechanism should be non-discriminatory and open to old or new plants’’ and different fuel types,” Massara said. “A megawatt is a megawatt is a megawatt.”

(Updates with Green Investment Bank, comment from second paragraph.)
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