To Philip Hammond (Chancellor of the Exchequer) and Greg Clark (Secretary of State for Business, Energy & Industrial Strategy):
Ensure that the cheapest forms of clean energy - onshore wind and solar PV - are not frozen out of the UK energy system, by reinstating a competitive financial support auction for future projects.
Dear Mr Hammond,
Enabling the UK’s cheapest low carbon energy technologies to compete
In 2016, a record breaking 25% of our electricity mix came from renewables, according to the government's own figures. We welcome the government's moves to further this record thanks to their investment in less established technologies such as offshore wind, as well as their commitment to demand side response and battery technologies in the December capacity market auction.
We’re now awaiting the announcement on the future of the Levy Control Framework after 2020, which we understand will be announced in the Spring Budget.
As the principal control mechanism to ensure value for money for energy bills payers as we accelerate the UK’s decarbonisation, this announcement will have significant consequences for future investment decisions and costs borne by consumers.
As such, we believe it is imperative that a stable future deployment pathway is established for the two cheapest sources of low carbon energy - onshore wind and solar PV - so as to ensure we achieve maximum decarbonisation while protecting consumers from higher bills.
Onshore wind is low cost
According to the National Audit Office, onshore wind is the UK’s cheapest form of new build capacity. Even less bullish estimates, such as the BEIS autumn 2016 cost assessment, expect onshore wind to undercut new CCGT between 2018 and 2020. Onshore wind is the cheapest new low carbon power source we can build.
Excluding it from financial de-risking policies, and therefore blocking most projects’ route to market, will increase the cost of decarbonisation to the bill payer. It will also undermine the government’s manifesto pledge to achieve the lowest cost decarbonisation.
The cost of excluding onshore wind is significant for the billpayer
The Citizens Advice Bureau, in collaboration with NERA Economic Consulting, modelled the impacts on the overall cost to decarbonisation of excluding onshore wind from CfD auctions in 2015. They found that for each CfD auction round run without onshore wind, an additional £500m would be added to consumer bills over the 15 year contract period. With multiple auctions likely to be run to bring forward sufficient low-carbon power investment to meet emissions reduction targets, this additional cost could easily become a multi-billion pound proposition.
Policy Exchange similarly identify that replacing 1GW of onshore wind deployment with the equivalent amount of generation from offshore wind would add £75-90m per year.
With ambitious emissions reductions targets written into domestic law the UK has to invest in rapidly decarbonising the power sector. Onshore wind provides the most cost effective way to do this. The figures quoted here highlight the danger of escalating costs of alternative options if a route to market is not provided.
Solar PV cannot fill the gap
It is particularly troubling for the effective use of public resources that, due to the state aid rules surrounding the CfD mechanism, scale solar PV is also unable to bid for the same financial security that less mature renewables, fossil and nuclear generators have access to (via either CfDs or the capacity market).
As the UK’s second cheapest - and rapidly cheapening - low carbon power source solar PV might have been able to lessen the cost impact of excluding onshore wind from CfD rounds. However, by failing to run any Pot 1 CfD auctions, this mitigation is precluded, so the full additional cost implications will be realised.
This is compounded by the sudden reduction in FiT rates in 2015, which have led to an 83% reduction in average quarterly deployment of PV under the FiT in Q1-Q3 in 2016 compared to the same period in 2015 - according to the Solar Trade Association.
Freezing out the UK’s cheapest low carbon power sources
The decision not to run future Pot 1 CfD auctions means freezing the UK’s two cheapest low carbon power sources out of new energy investment and deployment.
This will have several negative consequences.
First, as discussed, it will increase the cost of the UK’s decarbonisation.
Second it will endanger crucial supply chains, skills and investment. 70% of spend on onshore wind over a turbine’s lifetime is in the UK. Thousands of jobs are supported - with the potential for strong growth. Skills needed to build on the huge success of renewables deployment in the UK over the last decade are at risk of being lost as pipelines dry up and jobs are lost - Endurance Wind UK’s closure is just one example. Investment is also being stymied: the unexpected early closure of the Renewables Obligation led more than half of major onshore wind lenders to say they would not lend in future. This trend will continue if the financial de-risking permitted for other technologies is not reinstated for wind. More broadly, the Office for National Statistics found that the UK’s clean energy sector shrank by 8.7% between 2014-15, in part due to policy changes affecting onshore wind and solar PV.
Third, it endangers public consent for the necessary transition to a low carbon economy. While public support for renewables remains very high (over 70% for onshore wind and over 80% for solar PV), concerns over the cost of energy have the potential to derail necessarily ambitious decarbonisation plans if ‘green taxes’ are identified as causal factors. Notwithstanding the undeniable long term cost and environmental benefits of investing in renewables, it would be prudent to honour the Government’s manifesto commitment to lowest cost transition in order to ensure public consent for action on climate change remains strong.
Fourth - and most importantly - for all of the reasons above it risks endangering the UK’s ability to meet its global climate change obligations. Since the Paris Agreement in 2015 a new global consensus has emerged over the need to work together to prevent catastrophic climate change. In order to achieve this all countries need to up their ambition - the UK will struggle to do so by ignoring some of the best tools available to build the transition. Domestically the Committee on Climate Change identified the lack of support for onshore wind as a policy gap in its June 2016 progress report to Parliament on meeting the UK’s own carbon budgets.
Reinstating support for onshore wind and solar PV
In light of all these considerations we the undersigned call on the Government to ensure that the cheapest forms of low carbon power - onshore wind and solar PV - are not frozen out of the UK energy system, by reinstating a competitive financial support auction for future projects. Future Pot 1 CfD auctions can be amended, with a tapering cap on the administrative strike price, to ensure further cost reductions over time. By holding the strike price for onshore wind level with the cost of a new CCGT plant the Government can honour its manifesto commitment not to provide new subsidy to onshore wind.
Both onshore wind and solar PV deserve the ability to compete on a level playing field with other generation technologies. As things stand the Government is picking winners before the game's even been played.
We would welcome a meeting to discuss this further and look forward to hearing back from you at your earliest convenience.