Renewable Energy in 2017

2016 was the year when forces building since the 2008 financial crash finally caused political rupture. 2017 will bring further uncertainty with far right candidates making noise in the upcoming elections in France, the Netherlands and Germany this year and, of course, finding out what President Trump and Brexit actually means for the USA and UK respectively and for the world. These uncertainties may knock business confidence and renewable energy will not be immune.

But those who have made their living in renewable energy are used to uncertainty. The renewable energy market has absorbed around a dozen policy changes over the last 36 months, including the closure of ROCs to new ground mounted solar and new onshore wind and increasing planning regulation in England for wind projects. The age of subsidised generation for onshore wind and ground mounted solar has passed.

We expect development of new generation capacity to be largely constrained to developments with grandfathered subsidy rights. The capacity market is coming into focus for renewable generators, with the latest capacity market auction announced in December 2016, securing over 52GW was electricity capacity for winter 2020/21. This includes for the first time low-carbon battery storage. We expect battery storage – including retrofitting at existing sites – to be an increasing feature of the renewable energy market this year.

The price of oil is markedly up at the start of 2017. On 4 January 2016, Brent Crude was trading at around $37 (dipping to under $28 by mid January 2016) but on 4 January 2017 it is up at $55. UK wholesale electricity spot prices are also up from around £42 per MWh in January 2016 to around £52 per MWh this year. It is worth bearing in mind the strike price under the CfD for Hinkley Point C is £92.50 per MWh, which indicates the Government’s expectation of direction of travel of the energy market over the next 10 years.

This starts to make post-subsidy renewable energy projects more economical, particularly if procurement costs can continue to drop. The weakened pound post-Brexit continues to be a challenge to this. That said, SSE has recently ordered 228MW worth of wind turbines for the Stronelairg wind farm, the largest onshore wind development in the UK, although we understand that SSE will be seeking grandfathered ROCs for commissioning in 2018.

After a number of delays, we have the prospect of a new CfD auction this year, with an annual budget of £290M for delivery years 2021 – 2023. The round will be open to offshore wind, advanced conversion technologies, large AD, dedicated biomass with CHP, wave, tidal, stream and geothermal projects.  Onshore wind and ground mounted solar – the two cheapest technologies to deploy – will not feature.

So our expectation is that transactional activity in the renewable energy market in 2017 will focus on trading operating assets. This will be driven by a weak pound making UK assets look relatively cheap to foreign investors. On top of this, subsidy income from renewable projects is, generally, index-linked, so renewable projects offer a good hedge against inflation, driven by the same weak pound.  And, with energy prices on the rise again, the non-subsidy part of income looks set to improve.

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For More Information Contact:
Andrew Fleetwood
Mobile: 07841 920101
Direct Dial: 0131 516 5365
Email: afleetwood@gilsongray.co.uk

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The information and opinions contained in this blog are for information only. They are not intended to constitute advice and should not be relied upon or considered as a replacement for advice. Before acting on any of the information contained in this blog, please seek specific advice from Gilson Gray.