It looks increasingly as if onshore wind has become too cheap to be awarded a renewables contract, but too much of a misfit to live in the fossil generation market.
It is often said that investors are good at living with risk, where market prices can go up or down, but bad at coping with uncertainty, where the rules of the game can themselves be changed. This adage has seemed particularly apt in recent weeks for wind investors.
Some investors may feel that the news of a Tory subsidy change for onshore wind has highlighted the worst aspects of UK energy policy: the UK wants to use “market mechanisms” as an investment driver, but its artificial markets are often worse than having no market at all.
Renewables policy has come a long way from the simple Renewables Obligation Certificates (Rocs), where all renewables received the same premium to market prices. After banding came different technology buckets for contract allocation and then auctions. The revealed prices tell us little about the value of the generation.
While offshore wind and nuclear still appear expensive enough to secure government contracts, new wind projects are apparently expected to compete with fossil generation. The problem with this is that the traded European carbon price is pitifully low and UK carbon price support is uncertain and well below the implied carbon prices from other forms of policy support. In addition, cash out and spot pricing for wind have considerable risks. Existing and new fossil stations are awarded capacity contracts while onshore wind may have to rely on spot market revenues alone.
To its credit, the UK has a track record of standing behind remuneration frameworks for existing capacity, but how do investors put a value on developing and deploying new technologies when their success may have more to do with fashion than economics?
In the end, onshore wind developers wanting to survive in the market in the long term may just seek to cut out the middle man and go direct to end users. As onshore wind becomes cheaper, corporate and even some household customers may be willing to pay the full costs of the renewable generation in order to have a genuinely green supply with no subsidies. Until then, developers may feel unloved and homeless.
Martin Brough, utilities equity analyst, Deutsche Bank