What Healey’s lower bills test means for renewables
The government has said it will only support energy projects that lower bills and connect to the grid without having to be heavily curtailed. Utility Week explores what this mean in practice, and the likely impacts on upcoming Contracts for Difference auctions.
Tom Grimwood, Clean Power editor
What Healey’s lower bills test means for renewables
The government has said it will only support energy projects that lower bills and connect to the grid without having to be heavily curtailed. Utility Week explores what this mean in practice, and the likely impacts on upcoming Contracts for Difference auctions.
Tom Grimwood, Clean Power editor
“A year or two ago, the government was beating its chest, saying: 'We're going to accelerate the grid. We're going to catch up. We're going to pull out all the stops to build the grid more quickly to enable projects to go ahead.'"
Johnny Gowdy, a director at Regen, reflects on the changing attitudes of a government which is now seeking to delay renewable energy projects until the grid can catch up. Gowdy is one of many experts Utility Week has spoken to about the Labour Party’s own energy transition - from clean power at all costs to a forensic examination of the costs of that clean power.
We asked how chancellor John Healey’s recent commitment that government will "only buy and build new projects when they lower bills and when they can connect to the grid" is likely to impact renewable energy buildout. In particular, we gauged opinions on the impact on renewables auctions, with energy minister Michael Shanks indicating there will be a "pause" following the eighth allocation round (AR8) to allow for "more significant changes" to the Contracts for Difference (CfD) scheme.
What does this all mean for AR8, which will open to bids in less than a month? Will it be the last auction of its kind? And does government actually have the powers to identify which renewable developments can connect quickly and bring down customer bills?
Picking winners
According to Barnaby Wharton, director of energy, climate and environment at PF Global, the recent reforms to the connections process have already brought an implicit end to the so-called 'Connect and Manage' approach to the deployment of renewables. He says the latest government stance is a more explicit declaration of its demise.
However, Wharton says it is "not clear" how the government can actually put its position into practice for AR8 because "there isn't an explicit way they can pick projects within the framework".
He says energy secretary Miatta Fahnbulleh could perhaps make use of her extended powers to ‘peek’ into and adjust the final auction budgets across multiple technology pots. However, this is a blunt tool: she will not be able to see the locations of projects to precisely identify those that would increase constraints costs, and even if she could, it may be the case that she cannot exclude these projects without also rejecting those she wants.
Wharton says tighter budgets might in general avoid awarding contracts to projects behind grid constraints because these schemes, particularly those in Scotland, are likely to have higher transmission charges. All other things being equal, they are therefore more likely to have higher strike price bids.
But Wharton says everything else is not equal. In the case of Scottish projects, they are also likely to have higher load factors, offsetting the impact of higher transmission charges.
He says this was demonstrated in the offshore wind auction in AR7, which had a separate clearing price for projects in Scotland. The government otherwise feared that English and Welsh projects would be overcompensated if a Scottish project with higher transmission charges set the clearing price for the whole auction.
In reality, the single Scottish offshore wind farm that secured a contract – SSE's Berwick Bank B - actually cleared at a lower strike price than the successful projects in England and Wales.
Even with tighter budgets, Wharton says: "There is still the possibility that you could see projects in Scotland coming through the auction that may have an impact on constraints. I'm not clear how they can prevent that completely. They can manage the process to minimise the risk, but I think it's going to be very difficult to pick on particular projects."
He says the chancellor's statements could perhaps persuade some developers to bid for later delivery when key grid upgrades have been completed: "If I were bidding into this auction, I would be looking at the chancellor's statement and definitely think: 'I'm going to go for a later date when the network is going to be online and therefore my constraint costs will be much lower'."
These key grid upgrades include Eastern Green Link 1 and 2: the first two in a series of a so-called 'bootstrap' connections linking the power grids in Scotland and England. These high-voltage direct current (HVDC) cables will be laid underwater across the North Sea and are currently scheduled for completion around the end of this decade.
They also include three projects in East Anglia: two parts of the controversial Norwich to Tilbury scheme, a new 400kV overhead power line running between Norfolk, Suffolk and Essex, and the Sea Link project, an underwater HVDC cable between Suffolk and Kent.
Last year, the National Energy System Operator (NESO) warned there would be a sharp spike in constraints costs unless the East Anglia projects were completed in 2030 – a year earlier than scheduled. However, according to a recent report from the National Audit Office, there has been “no significant acceleration”.
With AR8 already underway and connection agreements in place, Gowdy says it may be difficult to shift generation projects' timescales to align them with the expansion of the power grid.
Nevertheless, he speculates that there may be conversations taking place between the government and "some of the larger offshore wind farms" - particularly those that will be affected by the grid upgrades in East Anglia - to see whether they could submit bids for later delivery years than they had previously planned.
Although some projects may be committed to their prior schedules due to procurement contracts and the conditions of their financing arrangements, Gowdy says some may also be open to delaying by a year or two as "there's a lot of pressure on the supply chain and installation vessels and various other things".
NESO's estimate of annual constraints costs by 2030 unless action is taken
What constraints costs could be in 2030 if reforms are made, according to LCP Data
Clean power is still the answer
Renewable UK chief executive Tara Singh believes the significance of Healey's statements has been overblown: "For me, it was more of a repeat of what we've heard before."
Although she was glad to hear the message from the chancellor as "you always wonder how far the Treasury is aligned with different departments", Singh says the government still holds the same position: that the best way to reduce energy bills is to "get off the gas" and build more renewables.
On the subject of constraint costs, Singh points out that most of these – around 80% in recent weeks – come from paying gas generators to turn up, rather than wind farms to turn down: "What you have to ask yourself as a government is: 'Is having renewable capacity on the system going to lower bills overall?'
"Clearly, if you expect gas prices to have periodic price spikes of the kind we've seen for the last 10 years, then having renewable capacity is always a good idea."
She further argues that "if you look at the systems argument in the round, it still makes sense to procure as much clean power as you can".
For AR8, the Department for Energy Security and Net Zero said the value of the bids on offer in different pots will be compared against each other using "internal metrics" developed in partnership with the Treasury.
Bertalan Gyenes, a consultant at LCP Delta, says the government's assessment of the cost impacts of bids will be heavily influenced by its assumptions, in particular gas price forecasts: "It would be good to have further clarity on what the government actually assumes there, especially because there's value to buying a bit more as insurance.
"Your central assumption might be that gas prices are going to fall but after the past few years it's clear that there's always the chance of there being a gas price shock."
Along similar lines, Gyenes emphasises that constraint costs are not just a function of the grid capacity and volumes of renewables connected, but also factors such as gas prices and network outages.
Sam Hollister, principal and head of UK market strategy at LCP Delta, notes that NESO's latest projections forecast annual constraint costs to rise to £7 billion in 2030, while LCP's own analysis suggests a lower figure of £6 billion.
More importantly, Hollister says there are a number of potential market reforms which could reduce this bill, potentially to between £1 billion and £2 billion.
When weighing up the cost impact of bids, Gyenes says the government also needs to take into account the effect on the supply chain, particularly given Shanks’ reference to a pause before AR9.
He says if the procurement of offshore wind is substantially limited in AR8 because it's "too expensive", then this could end up pushing up prices subsequent rounds.
Singh says the government is well aware that "having a very stop-start approach really undermines supply chain investment" and it is "really committed to making sure that pipeline stays smooth".
She also says she has heard directly from Shanks that the "pause" he had been quoted on had been blown out of proportion; that it is mainly intended to allow the government to make some decisions that were previously expected to come ahead of AR8 but had been deferred to keep the auctions moving. This includes considering proposals to fix transmission charges at the point of investment.
To the extent that there is a pause, Singh says it will also allow the delayed Strategic Spatial Energy Plan to be reflected in CfD auctions.
It remains to be seen whether the chancellor's statements around the Budget mark a substantive pivot or, as Singh suggests, just a reiteration of the government's existing position. We will perhaps find out in February, when the results of AR8 are due to be published.
“Having a very stop-start approach really undermines supply chain investment.”
Tara Singh, chief executive, Renewable UK
