Recent proposals from the Scottish Government affecting onshore and offshore windfarms are potentially set to cause financial implications for those involved in the sector.
Renewables obligation certificates (ROCs) are the method by which the UK Government supports renewable electricity generators.
At present, these generators are awarded ROCs for each megawatt hour (MWh) of power they produce with each certificate being worth a guaranteed minimum, usually around £37.
The number of ROCs per MWh, however, depends on the category of renewable power being generated.
Until now, onshore windfarms have received one ROC per MWh generated and offshore generators have received two. Offshore wind receives a “double helping” of support to make it financially viable for investors.
Once a windfarm is commissioned, ROCs are guaranteed at the rate applicable at that time for 20 years.
The ROC support regime has operated positively, encouraging substantial investment and helping to achieve the desired programme of rollout in both onshore and offshore wind construction.
This programme is required to meet the government’s international commitments on climate change and carbon reduction, however, the Department for Energy and Climate Change (DECC) and the Scottish Government have recently announced consultations on reducing the number of ROCs per MWh.
Both authorities propose similar reductions, based on the optimistic prediction that the cost of the technology will come down over time, meaning less support will be needed in the future.
Onshore wind generators would see a reduction in support levels from one ROC to 0.9. Offshore ROCs would be reduced in stages from two ROCs to 1.8.
These proposals may seem like small reductions, however, for an average onshore generator the cut is equivalent to a reduction in annual revenue of about £10,000 per MW. This could translate into a reduction in site value of around £100,000 per MW, or up to £250,000 per turbine for larger onshore windfarms. For bigger offshore windfarms, the reductions will be even more significant.
From a financial point of view, the guaranteed ROC income is a valuable element of revenue.
This is because bank finance is based around the guaranteed income stream in the early years of the project, when the senior debt must be repaid. If the guaranteed part of the income stream is reduced, risk increases, and financiers could potentially shy away from longer payback periods.
Financiers and developers alike could look at the proposed reductions as a possible sign of declining support for the renewables industry in the UK. The future consequences for rollout in the wind-energy sector may be more significant than current government predictions indicate.
Caroline Cumming is a senior associate at north-east law firm Paull & Williamsons
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