Renewable energy infrastructure acclimatises to the post-subsidy era

With government subsidies largely a distant memory for the UK’s renewable energy infrastructure, the sector is charting its own future.

February 10, 2020

The end of government subsidies for onshore wind and solar may have given investors pause for thought, but amid a growing focus on ambitious net-zero goals, a new era of renewable energy infrastructure projects is coming on line.

The UK’s first subsidy-free solar plant – and the largest solar plant to be built so far - became fully operational in December, backed by Next Energy Capital’s Solar Fund. In Scotland, the circa 45MW Douglas West windfarm in South Lanarkshire bought by Greencoat as part of a £45 million deal remains on target to achieve full energization this year.

Such projects mark a transition for the country’s renewable energy infrastructure sector, which has been going through a period of adjustment since the UK government pulled the plug on subsidies back in 2015. 

In the past few years, the number of construction of onshore wind farms in the UK has dropped dramatically, prompting concerns the country could fall short of its targets to reduce carbon emissions to net zero by 2050.

However, more investors and lenders are now seeking out subsidy-free opportunities, explains Dane Wilkins, head of renewable energy infrastructure at JLL.

“The era of zero subsidies we are now in provides new challenges for investors as they seek comfort around the quality, visibility and certainty of future cashflows and they’ve had to adapt,” says Wilkins. “But momentum amongst both long term investors and lenders is now building again amid growing interest in the role of renewable energy in hitting net-zero carbon targets.”

Banks get on board

The proof of that, he explains, is that banks are now getting behind the sector’s developers. Close Brothers recently provided finance to developer Muirhall for its construction of the 46MW CrossDykes windfarm.

“Lenders are becoming increasingly comfortable financing non-subsidised schemes where revenues depend on a merchant view of power prices and the ability to contract on shorter-term agreements than in the past, when long term, utility-based contracts underpinned by subsidies were the market norm,” says Wilkins.

Not all comfort has been removed, however. In the UK, the government’s contract for difference (CfD) top-up mechanisms, underpin any loss of revenue from energy for 15 years. The latest round of CfD auctions saw the cost of wind hit a new low.

As the post-subsidy era provides more answers to current questions around the financing of projects and rates of return, more investors are likely to explore opportunities in the sector, says Dominic Szanto, Energy and Infrastructure director at JLL.

Technology increases appeal

Over the next four years, institutional investment in renewable energy is expected to rise by 10 percent, according to a survey last year by Octopus Investments. New technology, which makes infrastructure more efficient, will further encourage greater investment, Szanto believes.

“We’ve seen great advancements in scale, particularly in the past decade where each offshore turbine now generates up to five times the energy than in 2010, amid the wider industrialisation of the sector,” says Szanto. “The UK is now at a point where some 35 percent of its electricity comes from wind power.”

While utilities companies are the main energy buyer, and are likely to remain so for the near future, demand for renewable energy is also coming from corporates looking to power their own operations; beer giant InBev, recently signed a 10-year contract for electricity supply from German renewable energy developer BayWa.

“The next decade may see more environmentally-conscious corporates get involved in the sector,” Wilkins says. “But for investors, opportunities are limited as bidders far outnumber the amount of corporate PPA (power purchase agreement) openings.”

Indeed, for today’s investors, being part of the transition to a low-carbon economy may not be clear-cut but there’s no mistaking how the wider appetite for renewable energy is growing; the third quarter of 2019 marked the first time that renewable energy trumped fossil fuels in providing electricity to UK homes.

“The next, non-subsidy decade is really going to be shaped by the strategies of investors and corporates, as well as an increasingly empowered and climate-conscious end consumer,” says Szanto.