An announcement on the future of support mechanisms that fall under the government's Levy Control Framework (LCF) is expected imminently.
In a recent opinion piece, The Levy Control Framework under strain, we discussed how the budget for the LCF was much tighter than previously had been assumed. The LCF is set at £7.6bn/ year by 2020-2021 (in 2012 prices), but our latest analysis puts overspend at between £200mn/ year-£675mn/ year over the period. We believe that a series of factors have combined to make this so: among them, lower wholesale prices driving up the costs of contracts for difference (CfDs) and Investment Contracts, higher load factors for offshore wind impacting CfDs and the Renewables Obligation (RO), and underestimation of the amount of solar PV capacity deployed raising small-scale feed-in tariff (FiT) and RO costs.
On top of the LCF budget, there is 20% headroom that DECC is allowed to eat into while it develops a plan to bring spending back under control. That plan is unlikely to include retrospective policies and would therefore not affect existing contracts.
Among the options for reform is the closure of the small-scale FiT scheme from next year. Of all possibilities, this route has the greatest budgetary impact and we estimate could save up to £800mn/ year by 2020. The government could accomplish this relatively quickly if it utilises the comprehensive small-scale FiT review that has commenced. DECC might also consider pulling preliminary accreditation to prevent generators from getting early tariff assurance, some sort of aggressive degression, or imposing a maximum LCF cap for the FiT. Given the Conservative Manifesto pledge to end subsidies for onshore wind, it seems very likely that at least this technology will be excluded from FiTs in future, possibly save for community schemes.
Speaking to the energy and climate change committee about the small-scale FiT scheme today, energy and climate change secretary Amber Rudd stated: "We will be making announcements shortly on what will be available and what won't". So changes to the FiT could well be on the agenda.
The closure of the RO to sub-5MW ground-mounted solar is also a possibility. The potential saving would be in the region of £50mn-100mn per year, though this does not factor in potential grace periods or an acceleration of project development to meet any imposed deadlines. DECC has already made successful sorties into the 5MW+ solar space, so may see an attack below that threshold as an obvious move from the current bridgehead. Changes could be introduced as part of the Energy Bill 2015; primary legislation of course has the advantage of not requiring a time-consuming consultation process.
We are also expecting announcements on the CfD scheme. The government may decide to hold off from running another CfD auction until a time when other measures have been demonstrated to have reduced LCF expenditure. Or it may decide to make some structural changes to the auction. These could include a quicker move to technology-neutral auctions, an exclusion of onshore wind from the auction, reducing the strike price indexation proportion, or introducing refinancing gain-share provisions. Any structural changes could be implemented during 2016, following the introduction of secondary legislation and draft rules in the second half of this year.
Budget overspend cannot be ignored. The LCF cap has been explicit and present for several years and has never been billed as a moveable constraint. At least once there has been full disclosure of the measures government intend to take to correct the excess, all parts of the industry can begin to adapt and plan how they engage with the new world. That adaptability is about to be very strongly tested, but given the journey of innovation and cost reduction it has been on to date there is some hope that there is enough resolve and expertise to ultimately thrive--even if the road gets a lot bumpier in the short term. This does not have to be the road to perdition.