Energy management advisors

Good morning all, and welcome to our webinar on the challenges, to sort of developing and investing in renewables, in the UK. So this webinar is run by Cornwall Insight in partnership with Weightmans and comes ahead of a joint paper, that we are producing, covering the same topic area in in more depth. So I guess alongside presenting a bit of a general view of some of the key challenges facing UK renewables, we're also very interested in getting your views as market participants on some of the, I guess, key issues, facing the the market at the moment. And so as we go through this webinar, we'll be running a couple of polls to help gather sort of audience insights, into the the key challenges facing the market at this present time. So we'd very much appreciate your participation in those, as they occur. So by way of, introduction, I'm Dr. Matthew Chadwick, a lead research analyst, at Cornwall Insight. So responsible for our thought leadership outputs, and that includes sort of insight papers, webinars, very much like this, and podcasts and the like. I'm joined today, as you can see on the screen, by, Nick Fothergill, a Partner at Weightmans, and my colleague at Cornwall Insight, Jamie Moore. I'll let each of them introduce themselves at the beginning of their sort of speaking sections, as we go through. So just a couple of words, on Cornwall Insight. For those of you who are maybe not familiar with us. We're energy market analysts, providing a a range of market insight, consultancy, and training services, across the energy sector. We've already got an established presence in the GB, Irish, and Australian markets, and we're currently sort of growing a suite of additional offerings, in the Japanese and, northwest European markets, primarily focused on on Germany. I will now hand over to Nick to introduce himself, and Weightmans and say a few words about our joint project. So over to you, Nick. Thank you, Matthew. I'm Nick Fothergill, Partner in the London office of Weightmans, the national law firm. The Weightmans Energy team are are delighted to be working with Cornwall Insight again, on another report with them. Following on from our previous report on the collocation of renewable energy assets. At Weightmans, we work as a national energy team, with specialists drawn from across our network of UK offices, helping clients from across the energy sector, including developers, large utilities, investors, and funders, new energy services companies, and major energy consumers. Work spans the sector and includes wind and solar projects, battery and energy storage projects, waste from energy, low carbon heating projects, power purchase and offtake agreements, and decarbonization and sustainability projects. And we also provide, a range of ESG services as well. The report we're preparing with Cornwall Insight comes at an opportune moment, as we, find ourselves very much in an election year as we as we found out yesterday, and where the the pace of the the green transition is receiving particular focus. The report is also a reflection of the issues and priorities faced by our clients here at Weymans and which we hear about and come across every day as part of our energy practice. While green energy has a higher profile now than it ever has and the sector is attracting more interest than at any time, there are definite headwinds being faced by those trying to develop renewable projects in the UK and by those providing the capital for that development. We're still in a world of macroeconomic challenges both in the UK and abroad. High interest rates having a significant impact on projects as we know and affecting their ability to borrow money to fund development and construction and making, the competition to secure investment even more intense than it has been. Project returns are also often less attractive, than in a world of lower interest rates, and projects need to work a lot harder to win investment. At the same time raw material costs have increased significantly over the last few years with the impact of inflation and strained supply chains having a further impact. This has had a major effect on the economics of many renewables projects, curtailing some development and forcing a reappraisal of assumptions on profit profitability for many projects. This is set set against the backdrop of some conflicting political messaging and a sense of a slowing down of previous commitment to the pace of the green transition in some quarters, which sends confusing and unhelpful signals to investors who need to be able to plan for the long term with confidence as we know. There are also a number of sector specific issues facing renewables developers, and investors in the UK, and today's webinar will touch on some of those, and our report when it comes out will look in more detail at those issues. One of the main hurdles to the development of renewables projects in the UK, which is something we frequently hear about from our clients here at Weymans, is access to the grid. The talk is often of grid connection offers for dates beyond two thousand and thirty, high grid connection costs, and of zombie projects jamming up the connection queue. It's often very difficult for developers and investors to plan and progress projects in the face of these challenges. And in the webinar, we will touch on this issue and look at some of the things that the government, Ofgem, National Grid, and others are doing to try and ease the problem. Planning permission is another hurdle that is regularly cited by players in the UK market. The long lead times, cost, and uncertainty of obtaining planning for projects can be a real disincentive for developers and investors looking at projects in the UK. Again, we'll touch on this issue during the webinar and again in our report. Route to market is another key investment factor that keeps coming up. The as we know, the CFD regime has been a central support for the renewable energy sector for a number of years, but there have been issues, and some criticism of the recent, allocation round five. So it will be crucial to see how the mechanism develops and adapts to the current environment. The interplay going forward between the CFD, the merchant approach, and the various different types of PPA will be something that is touched on today, and in further detail in our report. So if the UK is to hit its twenty fifteen net zero commitment and is to achieve the goal of decarbonizing the power sector, then we'll need a lot more renewable energy projects to be commissioned. There's an appetite from developers and iinvestors to make that journey a reality but there are hurdles to be got over and increasingly attractive markets elsewhere in the world who are competing for capital, particularly given the incentives in the USA with the Inflation Reduction Act and also in the EU. Our report will put a spotlight on some of the key issues facing renewables developers and investors in the UK at the moment. And this webinar is a taster of what is to come in our report. We hope that today wets your appetite and that you find it interesting and useful. I'll hand back to Matthew. I think I'll jump in here instead, Nick, if if that suits. And, I think if I could just grab the next slide, Matthew, and I'll introduce myself. So my name is Jamie Moll. Matthew introduced me a little bit earlier. I work alongside Matthew in the research team here at Cornwall. Again, similarly sort of working on our our thought leadership proposition, so, helping to to sort of author insight papers, and taking part in various industry events and webinars, like this one today. But I think that's enough of that. I think first things first, really, and and Nick gave you a good, I guess, a good flavor of of what's to come. But I think before we sort of delve into what the the various challenges are that are facing renewable deployment and investment in the UK, I think it's first, first of all, important that we establish you know, when we refer to this sort of hyperbolic road to net zero, where we are on that road and and also where we've come from because I think it's quite easy to get to get lost in it all. So to bring you back a little bit, you know, decarbonization in and of itself is still a relatively new concept in a sense. It began to gain major political attention in the nineteen nineties, but, really, the first, emissions reduction legislation didn't come into place in the UK until two thousand and eight with the Climate Change Act, with the concept of net zero being even younger, and only being in enshrined in law in twenty eighteen. In that fairly short span of time, though, we've managed to make quite significant progress. We've scaled up our renewable supply from just over one and a half gigawatts in nineteen ninety, to about fifty six gigawatts today. And in that same period of time from about nineteen ninety to twenty twenty two, we've also managed to reduce our our emissions by over fifty percent, in fact, making us the the first major economy to do so. The power sector, of course, has been, you know, vital and spearhead in this transition as emissions have fallen by seventy three percent, for electricity supply and sixty percent for fuel supply. So, really, with the the the power sector, I guess, being ahead of the curve in a sense. But we have obviously got broader aspirations than that. We want to reach power sec sector decarbonization by twenty thirty five and, of course, net zero by twenty fifty. And so there's a real need to to continue this momentum. I guess just to put this challenge into some perspective, if we have a look at, national grid's future energy scenarios report from 2023 it states that the UK will need to reach around two hundred and twenty five to two hundred and eighty seven gigawatts of installed low carbon or renewable electricity capacity to reach its its decarbonization targets. As of 2023, our total electricity supply is around a hundred and twelve gigawatts, of which, as I say, about fifty six gigawatts is renewable. So there's a massive growth trajectory there. But if you have a look at the the figure on the right hand side of your screen there, you can see that our total viable pipeline according to Cornwall Insight's renewable pipeline tracker, You know, this should be feasible. We're looking at a pipeline of over four hundred and fifty gigawatts of renewables projects, which, yes, granted, not all of them will come to fruition, but, it it it does go to show that there is a, you know, there is significant, impetus and ambition there. It's just the case that there are barriers in the way that need to first be be broken down if we want to actually realize this. So I guess that that that brings me on to my first poll for today, which Matthew mentioned earlier on, which is really, I guess before going into the the the sort of specifics of these challenges, what do you see as the, you know, the greatest challenge to the deployment of renewables in the UK? So is it things like macroeconomic headwinds, you know, high interest rates, the high inflation that we've seen, albeit it has fallen now, and and kind of the higher cost of capital that that's fed through to? Is it things like getting planning permission or securing a grid connection? Or is it maybe the, I guess, perhaps confusion around securing a route to market, or perhaps even subsidy schemes don't seem as attractive to you anymore? I think the other thing is if if you have, I guess, if you see the major issue being something other than that, then, I would welcome you to to type that out in the chat as well. I'll just give you a few seconds to to collate some answers here before, moving along. Seems like so far, getting a good connection is, is definitely taking the taking the lead on this, though. Think I'll give it ten more seconds. I'm still seeing quite a lot of votes coming through, though, so maybe I'll draw that out a little bit. Still a lot of votes coming in, so I'm just gonna keep it open. Okay. Looks like we're not getting anymore now, so I'm going to to close that one for now. If you don't get the chance to to if you're still making your mind up and you don't quite get the chance, feel free to to, yeah, to pop it answered in the chat as well. And we will we'll move on to the next slide. Brilliant. So I think the first of those issues that we want to touch on today is macroeconomic headwinds. And, really, it's because if we are to, you know, successfully realize a a significant proportion and as I say, it's unrealistic to assume that that entire four hundred and fifty gigawatt pipeline will come to to to sort of generating electricity. But if we're to successfully realize a significant portion of this, the UK will need to leverage significant volumes of investment across, the the energy sector. On the one hand, the climate change committee has estimated that investment volumes would need to rise to about fifty billion pounds per year, by two thousand and thirty, If we're to meet our targets well the national infrastructure commission estimates a slightly more conservative but still quite staggering thirty billion pounds per year until two thousand and fifty, again, if we're to to meet net zero targets on time. I think the point here really is that, well, this was always going to be a difficult task. That's a massive sum of money. The investment environment in previous years may have been more favorable than it is now. If you look at the period following the global financial crisis of two thousand and eight, two thousand and nine, the investment kind of expansionary fiscal policy at the time allowed for lower inflation and interest rates and created, I suppose, a more benign investment environment. Since the COVID nineteen pandemic and then since the energy crisis more recently, this has, of course, shifted, and Nick touched on that earlier. With COVID, obviously, the the implications were were massive. Relating to the energy sector, we saw, you know, massive implications for supply chains as entire economies slowed down their production. In particular, with China taking significantly longer to fully exit lockdown than many other countries, it really only did so in early twenty twenty three. We've seen major supply chains that are necessary for the build out of renewables being slowed down. And that not only causes delays to project x that are either under planning construction, but it also causes, prices to rise as well. And while those issues have eased somewhat in more recent months, there are still massive backlogs that will take, that will take time to overcome. When we're looking at the energy crisis, it's not only changed our view of international energy markets, it's also driven prices of of gas and, in turn, electricity to historical highs. As we've all seen, that had knock on effects across the economy, causing inflation and interest rates to rise and making renewable projects, among other things, more difficult to finance, even actually when in receipt of subsidy support. And that's something that we saw, feed through to the the results of the most recent allocation round allocation round five of the contracts for different scheme. And, you know, to to tto further complicate the situation, we've also seen other major economies, for instance, the United States States and the European Union introducing, perhaps for lack of a better term, net zero support schemes, which allocate support that that simply cannot be matched by the UK. When you look at the Inflation Reduction Act, in the United States, the sums of money on offer are, on a level that that quite simply the UK can't compete with. Well, in the EU, the sort of, European Green Deal, in particular, the Green Deal Industrial Plan, has, I suppose, attempted to break down the regulatory red tape, regulatory barriers to net zero, again, sort of on a scale that we can't necessarily replicate in the UK. I think, certainly, at the time, this led to quite a lot of fears around the relocation of capital if the UK isn't able to position itself as an attractive investment destination. I think some of those fears have not necessarily subsided, but perhaps been tempered, particularly in relation to the Inflation Reduction Act as things like the offshore wind sector haven't, haven't necessarily been, or rather to say, not all sectors have been, I guess, taken over, with the the Inflation Reduction Act. Offshore wind in particular, hasn't necessarily been able to be be helped out by it as much as as people perhaps thought. I suppose that leads me on to the next question that we have for you all, which is, you know, the UK has previously been in a position where, particularly for things like offshore wind, we've been, you know, seen as leading the way, towards net zero with the macroeconomic headwinds that we faced and with the other challenges, which we'll come on to discuss in a moment. Do you think that the you know, where do you perceive the UK at the moment within this global race to net zero? Do you think that we're still leading the way? Do we still, you know, are we still at the head of the pack there? Are we just, you know, sort of keeping pace and it's now, you know, the the US, China, the European Union miles ahead of us, or do you think we're perhaps falling a little bit behind? So, again, I'll I'll leave that open for, about thirty seconds or so, a minute, or perhaps rather until the votes start to to tail off a little bit. Some interesting responses thus far, though. Some really interesting responses thus far. Okay. I'll give you another another fifteen seconds or so. We're almost at the same sort of amount of people having voted as in the last one. Okay. Looks like the the voting activity has died down, so I'm gonna close that one over. And with that, I'll I'll hand you back over to Matthew, to take you through locating and connecting. Great. Thank you, Jamie. Yeah. So I guess following on from Jamie's discussion really of some of the general background, and some of the sort of macroeconomic headwinds that the UK has faced in the last two years. I'm gonna look at some of the other sort of major challenges, that were both alluded to in our earlier poll and discussed by Nick at sort of the beginning of today's webinar. So, yeah, starting with some of those challenges around obtaining planning permission and accessing a sort of timely grid connection. So planning permission and grid connections, as Nick mentioned, are two of the sort of most often cited challenges when discussing the factors limiting renewable rollout in the UK, at the moment. I'm sure many of you will no doubt be aware of the sort of planning law changes in twenty fifteen and twenty sixteen that essentially created a de facto ban on onshore wind development. In England, the impacts of which can be seen really quite clearly in the left hand graph on this slide when we look at installed onshore wind capacity in Scotland and England over the last sort of decade and a half. You know, in England, since the start of twenty twenty, only four point two megawatts of new onshore wind capacity have come online. Whereas if we look at sort of Scotland and Wales, we've seen a hundred and ten megawatts come online over the same time period. So clearly, a sort of significant impact in this sector. And in September twenty twenty three, we did see sort of an update to some of the policies to try and increase the potential for what would deem sort of suitable areas for onshore wind, to be identified. But many within the industry still consider that these changes don't really go far enough. And certainly, we've seen no sort of sudden uptick, in planning applications for onshore wind in England in the sort of eight months since those changes were enacted. In addition to the planning permission challenges, another major obstacle is getting a grid connection and, specifically, I guess, getting it in a timely fashion. So according to the National Grid's, electricity transmission connection map, transmission connected projects in England and Wales are looking at connection dates starting from sort of two thousand and thirty three at the earliest. I guess further promoting this point, the pie chart that we've got on the right of this slide, is taken from some analysis of Cornwall Insight's renewable pipeline tracker and indicates that between twenty eighteen and twenty twenty three, over sixty percent of the projects in that pipeline showed no change in their development status. So it's really highlighting that despite that large pipeline of renewables that Jamie outlined in his first slide, without an improved sort of grid connection process, the majority of this pipeline you know, seemingly unlikely to to be realized. As I was building on that point, I'd just like to highlight some of the policies that have been put forward to help speed up grid connections, and potentially improve the queue to get more renewables online sooner. So it's the first of these, is the connections action plan, from the Department of Energy Security and Net Zero, and Ofgem. And this plan has a a series of key aims, including imposing stricter entry requirements, to hopefully reduce the number of, what are deemed speculative applications for for grid connections, alongside implementing sort of more, milestones to help keep projects progressing, and hopefully remove any stalled or, as Nick said, the so called zombie projects, to free up that capacity in the queue. The plan would also aim to more generally improve the modeling process and sort of data use to better streamline grid connections and make more efficient use of existing infrastructure, as well as sort of heralding a change from this concept of first come, first connected to a greater sort of prioritization for projects based on how ready they are to connect to the grid. And then the the second, I guess, policy that I've outlined on this slide is as part of, the electricity system operators connections reform process. They recently released, an updated target model option four, so now being called TMO four plus that tries to take into account some of the changes that the ESO believe will better align with the key aims under the connections action plan. So I guess a major component of this is the application of, gate two criteria and milestone to both the existing queue, as well as sort of new applications. So this has been suggested to potentially half the current queue size, by sort of removing queue positions for any projects that don't meet, these gate two criteria and then using that freed up capacity to offer better connection dates, to successful projects. And these suggested changes are likely to be met with no small degree of dissatisfaction from existing queued projects that are potentially having sort of the rug pulled out from under them. But stems, I guess, from the fact that unless these new changes are applied to the existing queue, then the queue would need to be emptied before any of the reforms could actually sort of take effect. So I guess in a way, the ESO finds itself caught a little bit between a bit of a rock and a hard place. So I guess in light of this then, we're interested in in getting your thoughts on whether you think these recent changes, in policy will actually help improve, grid connections, you know, with the options being yes yes, but potentially not enough, you know, no or or maybe unsure at this stage in time. Yeah. Yeah. So I'll give you a little bit of time to to vote on that. Yeah. So a lot of lot of uncertainty, coming through in in respondents. Fair amount of people think, either, yes, these solutions are are going to make a difference or, yes, but, you know, maybe they don't don't go far enough. Yeah. I'll give you couple of seconds more to fill that in. Excellent. Yeah. That looks like, looks like we sort of reached capacity on on votes there. So we will move on to the next, slide. And that's really, I guess, considering routes to market. And this is, sort of the final area that I'd like to look at as as part of this webinar, is some of those challenges around securing routes to market, for renewables. So in recent years, since the closing of the renewables obligation, the contracts for different scheme as our sort of only extant subsidy scheme has been the primary route to market, for the majority of new sort of renewable capacity in the UK as as mentioned by Nick earlier. However, we're seeing a growing interest in some sort of alternative options, such as the signing of power purchase agreements, either through sort of traditional utility PPAs or, sort of corporate PPAs with one or more potential offtakers. And this interest in alternatives to the CFD, was really only exacerbated by some of the challenges faced by renewables and, again, primarily, offshore wind during the the fifth allocation round of the CFD. However, even with this growing interest in, more merchant routes to market, the sort of complexities and time frames associated with setting up things like a CPPA means that the CFD will likely remain an important sort of route to market in the future, even if potentially not the sort of the dominant route. And in light of this, there are sort of a series of open questions, I guess, around whether some of the short term changes, made to the CFD ahead of, upcoming allocation rounds, such as the increase in administrative strike prices, shown in the left hand graph here, as well as some of the potential longer term changes that have been proposed under, RIMA or the review of electricity market arrangements as shown in this right hand diagram. Whether any of these short or long term changes are really sufficient to, I guess, regain and maintain the momentum, in the net zero transition. So just to launch a final poll then, to get your views on, you know, what is the most attractive routes to market, for renewables at present, considering sort of the the CFD, various PPA variants, or a another. And, again, I'll give you thirty seconds or so just to to fill that in before we, wrap up the the webinar. Yep. Starting to get a couple of votes coming through. Lot of support for, yCPPAs and and the CFD at the moment, with those aggregate CPPAs and sort of other PPAs, maybe at less less sought after. Great. Well, it looks like we've, yeah, sort of reached stasis on, votes there. So we'll we'll close the poll, and, yeah, wrap up the the webinar. So, yeah, as I said, we're gonna finish up there. Thank you all for attending today's webinar and, again, contributing to our polls. If you do have any questions or thoughts, on what we've said today or are interested in providing, you know, any input or thoughts to the report, essentially, as an interviewee, do feel free to, pop something in the chat, or, you know, get in touch with any of the three of us. The email address is shown on screen. We're happy to answer any questions or talk to you about the report. So, yes, just remains to say thank you again, for attending, and I hope to see you all, on future webinars or at future events. So with that, yes. Goodbye for now.