It’s just 24 hours since the newly instated Conservative government delivered a body blow to the renewables industry, but Keith Anderson, boss of Scottish Power Renewables, is managing to keep his cool.
“There will still be some collateral damage,” he finally relents, but stops short of slamming the government’s decision to lock onshore wind out of its Renewables Obligation (RO) subsidy scheme from April 2016, with a possible block on the newer contracts for difference (CfD) regime too.
Anderson is Scottish Power’s chief corporate officer and runs parent company Iberdrola’s UK interests. He’s speaking today with his other hat on, as chief executive of Scottish Power Renewables. But as the man responsible for leading the group’s £15 billion renewables investment plan to 2020, you could forgive Anderson for a more vitriolic reaction to the policy U-turn that seems more based on Tory nimbyism than economics. He is still clear that the onshore wind sector has a role to play in the delivery of a decarbonised energy system and in reducing the costs of this process through innovation and competition. He is also clear that the RO cut could damage investor confidence.
But Anderson is already looking forward, focused almost entirely on a conciliatory path towards real solutions that both government and industry can get behind.
His tone is matter-of-fact, his rhetoric level-headed. But it’s still a far cry from the laid-back confidence he exuded when Utility Week first met Anderson in Scottish Power’s Glasgow office just over a month ago.
It was a meeting in very different circumstances. Then, the UK was still a week away from the general election and the outcome seemed far from certain. Although the Conservative manifesto pledge threatened a “halt” to the spread of onshore wind, Anderson was unfazed.
“We’ll cross that bridge if we come to it,” he smiled, clearly more interested in discussing the company’s most recent financial success. Anderson has held the reigns of Scottish Power’s renewables business as chief executive since July last year and held his group role since July 2011. In that time, onshore wind, and now offshore projects, have helped the company lead the way in UK renewables. Iberdrola is investing £1.3 billion in the UK this year and another £1.3 billion next year, much of which will be in renewable energy.
And for good reason. Iberdrola had just reported that Q1 earnings in the UK business rose 61 per cent – to €149.1 million – compared with the first quarter of last year. The key to this success was its increased renewable energy output, which grew by 15 per cent to 1.25GWh in large part due to the “standout performance” of its West of Duddon Sands offshore wind project. Anderson pointed out that the offshore windfarm exceeded its expected output, generating electricity at 55.8 per cent of its theoretical maximum. The load factor of the onshore wind portfolio is typically 32.8 per cent. “This shows the potential of offshore wind now that we are able to use larger turbines and better technology,” Anderson said.
Offshore wind output is just one of a string of successes Anderson was happy to discuss. Cost reduction was another key theme: the company’s 714MW East Anglia One offshore wind project has already cut costs from £140-150/MWh just last year to agree a support price of £119/MWh. It’s a cost trajectory that is familiar to those in the onshore wind industry. The technology could reach grid parity by the end of the decade.
Support for onshore wind was one of four key items on the big six company’s pre-election wishlist. But unsurprisingly the ongoing Competition and Markets Authority (CMA) investigation featured too. Anderson called on the new government to respect the outcome of the probe to restore much-needed trust in the industry – for both consumers and investors.
“The CMA investigation is the right way to determine the heath of competition in the UK energy market, to reassure investors, and to re-establish trust for customers. The UK utility sector has the highest political risk in Europe. That must change,” he said.
Specifically, Anderson said further investment is needed in pumped storage, a key technology that should emerge as intermittent wind deployment increases.
“There will be a greater potential role for pumped storage to provide cost-effective balancing services. This view is supported by National Grid. They estimate that an additional 4.5GW of new reserve is required by 2020. But current market conditions will not support such investment, so the new government will need to look again at possible incentive mechanisms,” Anderson said.
But central to the need for trust and investment is a stable electricity market reform (EMR) mechanism. Anderson called for EMR to have time to “bed in”. “It’s vital that this pillar of the framework continues to be respected by whoever forms the next government,” he said. But this hope, too, appears to have been dashed.
Back in the present, Anderson’s argument in favour of onshore wind is less about celebrating the sector’s success and more about trying to safeguard its future. Scottish Power will be working hard with government to ensure the framework survives the latest assault on its credibility so future growth is still an option, he says.
“What we’re looking to do now is to take up the debate with the government and ask, ‘what’s the future, where do we go from here?’” Anderson says.
“ have the absolute mandate to implement what they said in the manifesto. But I think the debate is how do you implement what was in the manifesto in a way that shows quite clearly the Conservatives have followed through on their pledge but in a way that protects investors, gives the best deal for consumers and allows the industry to keep going on and growing.”
One way that the government may have hoped to limit the collateral damage is through the inclusion of a “grace period” that will allow a maximum of 5.2GW of onshore wind to progress under the RO after the April 2016 closure provided full planning and land rights are in place.
Anderson says this is “helpful” but there will still be an impact on individual projects, the renewables sector and decarbonisation delivery beyond the next decade.
“Like every developer there will be projects that we’ve spent money that won’t access the RO so the next question is to go away and look at those, work out whether you think they will be in the CfD mechanism or whether you think there will be no support at all,” he says.
The CfD regime is now crucial. And with no decision on how it might change, there is everything to play for in convincing government that onshore wind should be included. Anderson is clear that there should be a place for onshore wind in the mechanism to help meet the UK’s decarbonisation targets and drive down the overall cost burden on the levy control framework funding pot.
Analysts have suggested that the 5.2GW grace period is generous enough to allow onshore wind to meet the consensus 2020 deployment forecasts. Others have added that decarbonisation targets are still achievable. But Anderson thinks this misses the point. “We’ve got renewable energy targets that we want the UK to achieve and that the UK has signed up to, but we’d quite like to see the UK go beyond those. The UK is in further conversation with Europe and the rest of the world about setting new environmental targets for the longer term so we would always encourage a government to look to the future rather than the next debate and the next target. Otherwise the danger is that you stall the industry and you stall the investment in the industry by restricting
it. You need to look beyond the target to see where you go next.”
Short-termism comes at a cost, Anderson adds.
“The conversation we’re having with government is that if you allow onshore wind to continue to compete in the CfD auctions it will drive down the cost of the overall delivery of the programme because it will compete and it will make other technologies more efficient.”
Onshore wind costs have already fallen from over £100/MWh to £80 and Anderson says the technology could reach grid parity by the end of the decade. “If the wholesale power price and the cost of the capacity mechanism leave the overall power cost at around £60-65/MWh then you can debate whether a CfD price of £70/MWh can really be considered a subsidy, he argues. Onshore wind isn’t looking for a handout – but like all other generation types in the UK energy mix, it does still need the certainty offered by the contracts to remain competitive and cost effective.”
In the eyes of an investor, Anderson points out, an attack on onshore wind support not only raises the cost of decarbonising the power sector but is also a blow to the whole support mechanism intending to bring certainty to a radical overhaul of the UK’s generation mix.
“The concern from companies like ourselves and from investors is that you’re putting money at risk under an agreed framework that has a specified timeline and specified rules. What you don’t want to see are sudden changes and unexpected changes to those rules and those timelines because that damages your confidence as an investor – and not just in that specific investment but in what might happen elsewhere,” he says.
The consent process for the next phase of its East Anglia offshore project, for example, will take over three years and £100 million to complete. “You need to be very confident that a government is not going to change its mind or change the rules of the mechanism in that three-year period it takes to get that projected consented.”
Much of the generation mix is already underpinned by subsidy mechanisms designed to bring certainty to an otherwise risky endeavour, and Anderson argues that onshore wind is only asking for what every other technology is receiving. It’s the only point at which he deviates from a message of solution-driven pragmatism to show genuine frustration.
“Why would you come to a conclusion that the only generation technology in the whole of the United Kingdom that somehow magically doesn’t need any kind of support at all would be onshore wind?”
But with just a few weeks of further government debate before the details of the next CfD auction is finalised, Anderson quickly returns to the task at hand: meeting the Conservatives half way.
“We can show that onshore wind should be allowed to carry on with CfDs and that by doing that we will make onshore wind as competitive as any other generation technology in the UK – then the Conservatives will still have implemented their manifesto pledge.”