Investors are advised to avoid taking part in Ed Miliband's clean energy bidding process
In the midst of economic challenges and growing public opposition, the UK's upcoming Allocation Round 7 (AR7) renewable energy auction is set to present a complex landscape for investors.
Maurice Cousins, campaign director at Net Zero Watch, has expressed concerns about the political and economic environment surrounding the auction. The potential risks and implications for investors, he notes, stem largely from public resistance to green subsidies and concerns about higher energy costs.
One of the key risks is the potential for higher strike prices and subsidy costs. The AR7 auction strike prices are expected to be significantly higher than previous rounds, reflecting rising costs in offshore wind projects. This could lead to increased consumer costs, raising questions about the economic viability from an investor viewpoint.
Political and public opposition is another significant risk. There is strong public resistance to green subsidies, with political figures warning that continuing to support these contracts could lead to penalties for investors or "haircuts" on subsidies if a government change occurs. This creates regulatory and financial uncertainty for investors.
The risk of contract disruptions is also a concern. Political statements from opposition parties signal potential attempts to renegotiate or renege on green subsidy contracts, which could materially affect the profitability and security of Contracts for Difference (CfDs) granted under AR7.
Delayed project deployment is another risk, with restrictions such as barring floating wind projects without full planning consent limiting the auction’s scope and potentially slowing the pace of deployment. This adds timeline risks for investors and delays returns on investment.
Market and price volatility is another factor to consider. The CfD mechanism provides a guaranteed strike price, but if wholesale prices rise substantially, government costs increase. If wholesale prices fall below guarantees, costs for consumers rise, increasing public and political pressure to revise these arrangements.
Amidst these challenges, the auction is considered critical by Energy UK and Offshore Energies UK for delivering Labour's pledge of a clean power system by 2030. However, the net zero consensus in politics is weakening, as the public becomes aware of the costs of the transition.
In a separate poll by Public First, when voters were asked which of Labour's election pledges Keir Starmer had made progress on, the most popular answer was "none of the above." This reflects the economic challenges the Labour government, which was elected on a low vote share, is expected to face, focusing on growing the economy and fixing the cost of living crisis, not signing long-term power contracts at elevated prices.
Reform-run councils have started the process of abandoning their net zero pledges, further indicative of the public resistance to green subsidies. More than 50 Highland community councils representing over 70,000 residents have demanded a summit with ministers to address what they call a "green energy Wild West."
Former energy secretary Claire Coutinho has accused Labour of overpromising on bills, while Nigel Farage recently warned that green energy investors should prepare for "some haircuts."
Despite these challenges, Renewables UK insists it is critical that Britain sends a clear signal that it remains a reliable and investor-friendly market. The length of the contracts has been extended from 15 to 20 years to provide some stability for investors.
However, many question the point of Britain leading the charge on net zero when it accounts for less than one percent of global emissions, while countries like China, India, and the United States continue to expand theirs. The auction, therefore, represents not just an economic challenge, but a global one as well.
In essence, investors face a complex balance of growing technical potential and societal needs with escalating public and political opposition, elevated costs, and regulatory uncertainty, all of which heighten financial risks in the AR7 auction compared to previous rounds.
- The political and economic environment surrounding the UK's AR7 renewable energy auction raises concerns for investors, particularly in regards to public resistance to green subsidies and higher energy costs.
- One of the key risks for investors in the AR7 auction is the potential for increased consumer costs due to higher strike prices and subsidy costs, which could question the economic viability from an investor viewpoint.
- Political and public opposition to green subsidies presents a significant risk, as there is strong resistance and warnings of penalties or "haircuts" on subsidies if a government change occurs, creating regulatory and financial uncertainty.
- The risk of contract disruptions is a concern, as political statements from opposition parties might lead to attempts to renegotiate or renege on green subsidy contracts, affecting the profitability and security of contracts for difference (CfDs) granted under AR7.
