Many ‘renewable’ projects are at risk from terminating subsidies
The Reform Party have pledged to ditch ‘net zero’ if they get into office. The Conservative Party have pledged to repeal the Climate Change Act, disband the Climate Change Committee, cut ‘carbon’ taxes on gas-fired electricity and end the lucrative Renewables Obligation Scheme
It is likely that Reform would adopt these policies if they were to get into office, and it is equally unlikely the Tories will not.
The proposed Tory measures would bring welcome relief to electricity billpayers. The Renewables Obligation Scheme (ROC) costs around £7.5bn per year and the ‘carbon’ costs on gas-fired electricity generation cost about £2bn.
‘Carbon’ costs have been rising recently because of the Labour Government’s announcement that they will align the UK with the EU’s Emissions Trading Scheme.
The Tory proposals will therefore cut around £10bn from out bills. Which players in the market would lose out if these measures were enacted?
Impact of Cutting ROCs
Using data from the Ofgem Renewable Electricity Register we can calculate the approximate value of ROCs issued in 2024 by technology as shown in Figure 1.
The biggest recipient of ROC subsidies is onshore wind, receiving certificates worth £1,697m in 2024. Offshore wind received £1.384m and solar £376m. The ‘Other’ category is dominated by biomass.
The total Other ROC subsidies received certificates worth £1,384m in 2024. Ending the ROC scheme early would significantly impact the revenue of these generators.
Impact of Cutting ‘Carbon’ Costs
Ending the ROC scheme early would not be the only impact on ROC-funded generators. They receive the market price, mostly set by gas plus their ROCs. Using data from Ember we can see that ‘carbon’ costs make up about a third of wholesale prices (see Figure 2).
Windfarm generators typically sell their output at a discount to the market price, so if the market price falls by a third, then their realised price would likely fall in tandem.
Impact on ROC-Generators
Many ROC-funded windfarms like Roos and Garreg Lwyd, owned by TRIG still hold significant debt on the balance sheet of the wind farm companies. Others, like London Array (part owned by Greencoat UK Wind) and Lincs (part owned by ORIT) hold debt in intermediate holding companies.
These investment companies also hold debt at higher levels and have overall gearing as shown in Figure 3.
Large ‘renewables’ operators such as RWE Renewables UK Limited record overall borrowings of £3,268m against investment in subsidiaries of £1,923m. although it is also owed £1,670m from fellow group undertakings.
A lot of RWE’s investment is in the upcoming Dogger Bank project. However, the cashflow and dividends from its ROC-funded units will be an important part of the revenue stream helping support the overall group debt.
Smaller ‘renewables’ operators such as the generation arm of Ecotricity also rely heavily on billpayer funded ROC-subsidies. The Ecotricity empire carried around £80m of debt from Ecobonds and bank borrowing in their last annual accounts.
Losing a third of market revenue by eliminating the carbon costs on gas-fired electricity will be a big blow to ROC-funded generators. Cutting off ROC subsidies early will have an even bigger impact on total revenue for these generators.
We have covered before the impact of losing ROC subsidies and eliminating ‘carbon’ costs on the asset values of a hypothetical offshore wind farm.
The model considered a 100MW, ROC-funded offshore windfarm with an assumed 10-year remaining asset life. The starting load factor is 40 percent with output declining at 1.5 percent per year.
The windfarm receives 1.9 ROCs per MWh of output with five years of subsidies remaining. Operating costs are £14m per year, equating to £40/MWh in the first year. The market price of electricity is £75/MWh made up of £50/MWh gas costs and £25/MWh ‘carbon’ costs.
It is assumed the realised price for the windfarm is 12.5 percent below market rates at £65.63/MWh.
Net annual cashflows start at £53.6m and fall slightly with declining output for the first five years, then net cashflows take a big dive in Year six as the subsidies run out.
Using a 10 percent discount rate the Net Present Value (NPV) of the first 10 years of those cashflows is £212.3m which represents the base-case Gross Asset Value (GAV).
If debt is 40 percent of GAV or £84.9m, then the base case Net Asset Value (NAV) is £127.4m. We can now work through the sensitivity of the NAV to a reduction in realised prices by the removing ‘carbon’ costs and the early elimination of ROC subsidies.
The results of this sensitivity analysis are shown in Figure 4.
Removal of ‘carbon’ costs reduces the GAV by 21 percent and the NAV by 35 percent. Removal of ROCs reduces GAV by 77.6 percent and takes the Net Asset Value negative.
Both measures combined reduces GAV to just £3m and turns NAV even more negative.
It is expected that the next elections will not be until 2029, so there is time for bankers to accelerate repayment schedules to protect their capital, but they need to act now.
Operators and investment companies can use current cashflows to pay down debt and get their balance sheets in order.
But if the Labour Government were to collapse, then the reduction in asset values will be accelerated.
Bankers beware.
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Header image: BBC
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