REA reports UK energy growth threatened by recent policy changes

By Katie Fletcher | June 10, 2016

U.K.-based Renewable Energy Association recently published its annual statistical REView 2016 report on the U.K renewable energy industry, reporting that despite record employment levels in 2015 recent policy changes threaten strong renewable energy growth.

The REView 2016 is the authoritative annual industry publication on employment, investment and deployment trends in the U.K.’s renewable energy industry, produced in association with Innovas and KPMG LLP. During 2015, record-setting employment levels of 116,788 employed in the sector in 2014-15, an overall increase of 4,760.

The report found high growth rates for renewable energy deployment and investment. A high growth rate of 6.6 percent was reported in 2014-15 for renewable power, heat and transport, slightly higher than the 6.1 percent from 2012-13 to 2013-14. The 6.6 percent growth represents a £982 million ($1.4 million) increase in total sector market value to £15.91 billion. Assuming significant progress continues to be made toward the 2020 target, then the analysis forecasts this increasing to £22 billion by 2019-20. The rest of the U.K. economy experienced growth around 2.5 percent. According to the report, if employment numbers increase at a similar rate to market value over that time, this would indicate an additional 45,500 people employed.

Last year, renewable energy supplied the U.K. with 22.3 percent of its power, 4.6 percent of its heat in 2014 and 3.2 percent of its transport fuels in 2015. Dr. Nina Skorupska CBE, chief executive of the REA stated commented, “2015 was another record year for British renewables. Employment, investment, and deployment increased, while costs fell and the industry continued to mature. It was yet another year where the renewables industry outperformed U.K. growth rates.”

The report included reports on anaerobic digestion (AD), including its use for power, transport, biomethane injection and combined-heat-and-power (CHP); liquid biofuels; biomass for heat, power and CHP; as well as other renewables. Overall, the U.K. has made considerable progress towards meeting its renewable objectives, the report finds. According to REView 2016, the U.K. is potentially on track to meet the renewable energy directive (RED) target of 15 percent of energy being renewable by 2020. In order to achieve this, the estimated trajectory for the U.K. averaged across 2015-2016, needs to be 7.47 percent of energy generated from renewables, and in 2014 the U.K. achieved 7 percent.

Although progress has been made, the REA’s report indicates that the growth rate is steep over the next five years, and there are stark differences between sectors and individual technologies. The report did not include a forecast for the technologies covered in the publication, but instead included detailed analysis of the history of the U.K. government interventions in the individual sectors because the degree of policy change, either enacted or proposed, makes these predictions impossible to make. “The industry was blindsided this year with over a dozen sudden and severe policy changes, which we expect will be reflected in next year’s report,” Skorupska commented. “While many businesses have been left reeling and deployment has begun to slow, as an industry we will persevere, we will innovate, and we will continue to grow.”

Renewable electricity generation—supported by the Renewables Obligation, feed-in tariff (FiT) and recently contracts for difference (CfD)—continues to grow at an average rate close to 25 percent year-over-year between 2009 and 2015. However, this average rate has come down in the last year (now 24.2 percent). Following the 400-MW cap on the RO for new biomass in 2013, growth has slowed, with only three contracts awarded in the early CfD contracts. There remains a Pot 3 for biomass within the CfD structure, but it has not been allocated any funds. According to the report, given the growth from 2014 to 2015, this sector has the strongest claim to being on track for 2020. The report also mentions that major uncertainties remain in the renewable power sector due to the RO closing to onshore wind and solar, as well as new entrants for other eligible technologies from 2017. “The first contracts for difference are still yet to have an impact on renewable energy capacity levels and there is uncertainty about how many further rounds of auctions there will be and which technologies will be allowed to participate in them,” the report states.

Renewable heat generation has also grown steadily, increasing on average by 25.4 percent year-over-year between 2009 and 2014 (the last full year for which data are available). Although only a small portion of the whole heat generation, the Renewable Heat Incentive has driven renewable heat generation to grow rapidly since it was launched, according to REView 2016. The nondomestic policy is dominated by biomass boilers and biomethane injection to the grid, while the domestic policy has seen 7,106 installations spread more evenly across biomass boilers, heat pumps and solar thermal. Despite this growth, the REA reports, the renewable heat sector is a long way short of the estimated contribution required for 2020. The RHI consultation, in progress, proposes significant cuts to biomass tariffs from April 2017, which if enacted will reduce the number of biomass boilers installed in 2017.

Biofuel consumption has increased on average by 0.47 percent between 2009 and 2015, showing a tremendous slowdown in this last year at -19.7 percent consumption in 2015 compared to the volume in 2014.

The report found that the U.K. now has over 260 AD plants, representing a total installed capacity of 250 MW. Although growth has been steady, the REA states that recent market intelligence suggests that there has been a drop in the number of projects in the pipeline, which reflects the policy situation. “It is a very critical time for the AD sector, as the Feed-in Tariff, the main support mechanism for biogas CHP plants, has seen dramatic reductions and the new cap system under FiTs is significantly restricting the AD capacity that can be deployed,” the report states. Even so, the recent RHI consultation foresees biogas and biomethane as strategic technology to decarbonize the gas grid, as well as waste and the agricultural sectors.

KPMG’s investment review concluded that the investment landscape is in transition after a turbulent year, but with attractive opportunities emerging that do not necessarily rely on subsidy incentives.

The full REView 2016 report can be accessed here.