Growing competition for investment in renewable energy projects from the US and the EU, could divert crucial financing away from the UK and hinder the nation’s journey to net zero, according to recent analysis by Cornwall Insight.
The report ‘Race to net zero: Rebuilding Investor confidence in the UK’ highlights the impact of subsidy and policy schemes worldwide, such as the US’s Inflation Reduction Act (IRA) and the EU’s Green Deal Industrial Plan (GDIP), which could give these regions a competitive edge over the UK.
Data analysed by Cornwall Insight shows the US witnessed a surge of investment in green projects following the introduction of the IRA, which offers substantial financial incentives totalling $369bn for net zero technologies and infrastructure from 2022 to 2032.
With a limited global pool of renewable investment, this could cause significant damage to the UK’s net zero plans, especially with challenges like rising inflation, supply chain disruptions, and labour shortages already hindering investment.
Figure 1: US investment in renewable energy in the first 60 weeks since the passage of the IRA
Source: American Clean Power
The UK government has announced short-term changes to its renewable investment incentives, in response to the mixed outcome of the fifth Allocation Round (AR5) of the Contracts for Difference (CfD) scheme, which saw record low levels of investment in renewable energy projects1. Concerns over a return on investment were seen as one of the core reasons for low developer enthusiasm.
With the sixth Allocation Round (AR6) due to begin in 2024, the government has taken this into account and implemented a series of changes. By raising Administrative Strike Prices (ASPs)2 – the maximum Strike Price a technology can achieve – the government hopes to regain interest and competition in the scheme.
Figure 2: ASPs for AR6 and AR5 (in 2012 money) and percentage change from AR5 to AR6
Source: GOV.uk
Despite these adjustments, uncertainties persist regarding long-term reforms and the suitability of the CfD.
The government is actively exploring reform options through the Review of Electricity Market Arrangements (REMA) to create enduring market structures for a fully decarbonised and cost-effective electricity system by 2035.
Additionally, it is reviewing features of future CfD rounds, including the possibility of separate pots for specific technology types, as seen with offshore wind in AR6 and the inclusion of non-price factors in the CfD scheme, with the proposed introduction of Sustainable Industry Rewards (SIRs) in AR7, AR8, and AR9.
Jamie Maule, Research Analyst at Cornwall Insight:
The UK’s position as an attractive destination for renewable investment is at risk of slipping, with the potential for significant setbacks in achieving net zero targets.
Once a trailblazer in global renewable energy investment, the success of the Contracts for Difference (CfD) scheme is now challenged by escalating capital costs, low Administrative Strike Prices, and intense global competition. While short-term incentives play a role, the enduring incentives in the US and the EU threaten to divert funds away from the UK.
Right now, the UK is certainly not a lost cause for investors, but it must act clearly and decisively if it is to rebuild investor confidence and maintain progress towards net zero. Timely government policies and proactive decisions are crucial. Waiting for events, like the lack of offshore wind bids in the last CfD allocation round, is a luxury the UK can ill afford.”
Reference:
- AR5 only secured 3.7GW of new renewable capacity, a marked reduction from the 11GW secured in the fourth allocation round (AR4).
- Administrative Strike Prices (ASPs) for offshore wind, will be rising by 66% from £44/MWh in AR5 to £73/MWh in AR6. Floating offshore wind will also see a 52% increase from £116/MWh to £176/MWh. Moreover, offshore wind projects will now contend in a separate pot, minimising competition with established renewable technologies.
- Ends
Notes to Editors
For more information, please contact: Verity Sinclair at v.sinclair@cornwall-insight.com
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About the Cornwall Insight Group
Cornwall Insight is the pre-eminent provider of research, analysis, consulting and training to businesses and stakeholders engaged in the Australian, Great British, and Irish energy markets. To support our customers, we leverage a powerful combination of analytical capability, a detailed appreciation of regulation codes and policy frameworks, and a practical understanding of how markets function.
"While short-term incentives play a role, the enduring incentives in the US and the EU threaten to divert funds away from the UK."
Jamie Maule Research Analyst
