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UTILITY WEEK | 26Th sEpTEmbEr - 2nd ocTobEr 2014 | 21 Finance & Investment Market view F or developers or investors looking at the UK market, the new contract for dif- ference (CfD) feed-in tariff regime adds difficult choices to an already fragile market fatigued by constant policy tinkering. The threat of budgetary constraints and further solar subsidy revisions have also come to the fore recently with negative implications for the UK's ability to attract investors – as EY's latest Renewable Energy Country Attractiveness Index (RECAI) shows. Taking a closer look, the dra budget for October's first CfD allocation round proposes that "established" technologies such as onshore wind and photovoltaics, will receive £50 million annually for contracts awarded for project delivery beginning 2015/16. Mean- while, "less established" technologies such as offshore wind, wave and tidal energy will be allocated £155 million for projects begin- ning 2016/17. While recognising the need to hold back budget for future years, there is a sense that the allocation is overly cautious and falls short of what is required to drive down the cost of renewables in the long run. The "less established" pot, for example, is barely suf- ficient to cover one small offshore wind project. The disappointment is all the more bitter aer the National Audit Office (NAO) con- cluded that the government has overpaid CfD subsidies to the eight renewables pro- jects awarded early final investment deci- sions in April. The NAO is "not convinced" that the decision to award £16.6 billion of contracts — equivalent to around 58 per cent of the UK's total available funding for renewables between 2015 and 2020 — is worth the risk to taxpayers, and claims it may have under- mined future bidding rounds by expediting contracts without ensuring sufficient price competition. Today's developers are also currently weighing the impact of a recent consultation on solar subsidies that would see the govern- ment withdraw Renewables Obligation sup- port for solar projects above 5MW two years earlier than planned, forcing them to com- pete for CfDs with other mature technologies from April 2015. This comes at a time when the UK is only the sixth nation to surpass the 5GW installed capacity mark for photovoltaics, while 2014 installations have put the UK on track to become the world's fourth-largest market for new solar deployment this year. The move has already sparked reactions from the sector, prompting legal challenges by four of the UK's largest solar companies and a petition by more than 150 businesses urging the government to give solar extra time and more policy stability to compete with conventional fuels, to avoid putting the UK's current position in the booming global solar market at risk. All these developments are doing lit- tle to reassure a sector that is already com- ing to terms with the significant challenges inherent in the transition from Renewables Obligation Certificates (Rocs) to CfDs, given the binary risk attached to the new support regime that is increasingly making it an "all or nothing" gamble for developers. While Electricity Market Reform (EMR) aims to reduce consumer energy costs and developer risk through a lower cost of capi- tal, there are concerns that it will result in developers taking greater risk, given the lack of certainty over securing a contract at all. Failure to meet stringent timing and capacity milestones attached to support lev- els also risks penalties or the sterilisation of projects, potentially excluding them from participating in further allocation rounds for 13 months. Given this increased risk, exacerbated by budgetary constraints and intense com- petition for the funds that are available, it seems that developer returns should in fact be going up, somewhat contrary to the prin- ciples of the EMR. There is also lack of flexibility inherent in the new regime. While traditional public- private partnerships have processes in place to facilitate negotiation and amendments to certain variables affecting the bankability of a project between preferred bidder award and financial close, there is little such com- fort under the CfD regime. Ill-timed assump- tions or changing conditions will simply hit equity, potentially making projects worth- less unless a higher CfD can deliver the same return. There is therefore a strong need for EMR to build in some additional flexibility to deal with fundamental changes between CfD award and financial close, if it is to avoid scaring away investors and developers with overly stringent terms. The result of this binary risk and lack of flexibility creates major concerns that the UK will see a stagnation of new projects. There are currently plenty of projects with planning permission and grid access that could create healthy competition for funding over the next few years, particu- larly onshore wind projects in Scotland, for example. However, current hesitations over project bankability in the context of the new support regime could create a dearth of projects beyond this, at a time when new capacity is most needed. We should be wary of pinning too much hope on new nuclear to fill the void le by the decommissioning of significant volumes of fossil fuel and existing nuclear power capacity over the next decade. In addition to the onus on policymakers to introduce greater flexibility and risk miti- gation into the EMR, industry itself needs to be better engaged with government in high- lighting and demonstrating the impact of policy on the market. To date, policymaking has sometimes been done in isolation, when more consist- ently joined-up and cohesive policy creation is what is needed. Without greater policy certainty, support regimes that address the reality of developer and investor priorities, and enablement to spur the achievement of grid parity, developers of new projects in the UK will either bite the bullet in the hope of securing contracts that will deliver returns, or they will pack up and go elsewhere. The question is how much the market can, and will, sway the outcome one way or the other. Ben Warren, environmental finance leader, and Klair White, RECAI editor, at EY The UK loses its green lustre The UK's attractiveness for renewables investment has fallen to a 12-year low. Ben Warren and Klair White look at what's prompted the decline and assess the outlook for the UK renewables sector.