Government urged to act now to save offshore wind ambitions

The UK will fail to meet its renewable energy targets and will miss out on the opportunity to establish itself as a world leader in the emerging offshore wind industry, unless the government introduces emergency measures to support planned offshore wind farms hit by soaring costs and tightening credit conditions.

That is the stark warning from the British Wind Energy Association (BWEA), which today released a budget submission calling for temporary measures designed to strengthen the economic case for both onshore and offshore wind developments and ensure recent progress in the industry does not stall.

The report says that bank lending for both onshore and offshore projects has seized up at the same time as the devaluation of the pound against the euro has resulted in 20 to 30 per cent increases in the price of turbines. As a result, some onshore wind projects are now "uneconomic", while there is "doubt that any new [offshore] projects can be brought to financial close under current circumstances".

Speaking at the presentation of the budget submission earlier today, the BWEA's chief economist, Dr Gordon Edge, said that £10bn of investment was " shovel ready", while about a third of the 35GW needed to meet the UK's target of generating 35 per cent of its electricity from renewable sources by 2020 was already built or had received planning consent.

However, he added that large numbers of projects had now stalled as a result of the economic crisis and that the outlook for offshore projects was particularly bleak.

This month, the government increased the subsidy to offshore wind projects 50 per cent to 1.5 Renewable Energy Certificates (ROC) per megawatt hour. However, the increased incentives were based on a report undertaken by Ernst & Young in 2007, which estimated that the capital cost of offshore wind projects was £1.5m to £2m per megawatt.

According to the BWEA, recent experience shows that the increased cost of turbines and gird connections means that the capital cost of offshore projects is now closer to £3m per megawatt and as a result, the economic case for planned developments no longer stacks up.

Adam Bruce, chairman of the BWEA, said that if action is not taken to strengthen the economic case, there is a risk that about 3GW of projects planned for Round 2 of the Crown Estate's offshore wind expansion plans could be delayed indefinitely. Industry insiders are fearful that such delays would seriously undermine confidence in upcoming Round 3 projects, which are seen as essential to both meeting renewable energy targets and establishing the UK as a manufacturing hub for the global offshore wind industry.

"If we allow offshore projects to stall now, it makes it very difficult to rebuild the expertise and teams we need to restart those projects," said Edge. "The worst-case scenario is that the UK would be left without its own offshore wind industry and we would miss our renewables targets by a large chunk."

The BWEA said that the government had to act to strengthen the economic case for offshore wind projects, either through direct capital grants or tax breaks totalling £2bn over the next two to three years; a further increase in the ROC subsidy mechanism; or a change in legislation to spread the cost of connecting projects to the grid across all grid users.

Edge admitted that £2bn in capital grants was probably an "unwelcome ask" given the current state of government finances, but argued that other measures could be put in place to make projects economically viable and signal to those developers considering building turbine manufacturing capacity in the UK that there will be projects for them to serve.

In addition to bolstering the economic case for offshore wind, the BWEA also called for the government to introduce measures to improve access to credit for both onshore and offshore wind developers.

A recent poll of BWEA members revealed that while the large utilities are generally forging ahead with onshore wind projects, smaller project developers are struggling to find the finance required to support projects.

"The banks are very favourable towards onshore wind projects and they would lend to wind if they were lending at all," observed Edge, adding that there had never been an instance of a UK wind energy project defaulting on its loan repayments. "When they wake up from their zombie state, wind projects will be top of the list for financing, but at the moment they are just not lending."

As a result of the absence of credit, there has been a significant drop in the number of new projects entering the planning system over the past six months, and the BWEA is concerned that in three to four years' time there will be a fall in the number of new onshore wind farms coming online, just at the time when the UK will need to accelerate its building programme if it is to meet its EU renewables targets.

To tackle the financing issues, the industry is recommending that the government either launch a dedicated state-backed bank to lend to infrastructure projects directly, or implement an insurance scheme that would underwrite floor prices in the power purchasing agreements between wind energy developers and utilities, removing the risk for banks and strengthening the case for them to resume lending.

Edge said that both approaches could represent long-term "money spinners" for the government and could be quickly removed or scaled back once the economy recovers and banks begin lending again.

Bruce added that the industry remained "broadly optimistic" that the government would act to address the current crisis, arguing that there was awareness at the highest level that the sector was facing challenges and had the potential to provide a major source of economic growth and job creation over the next decade.

The BWEA's calls came as Gordon Brown gave an interview with The Independent newspaper promising that the forthcoming budget would include improvements to the planning system designed to make it easier for wind farms to gain approval. However, he did not mention whether or not the sector could expect to see further financial support.

Speaking at an event organised by the Renewable Energy Association last month, energy minister Mike O'Brien, hinted that some form of support could be in pipeline, stating that the government was fully committed to meeting its 2020 renewable energy targets and was "examining how we can help ensure there is sufficient finance and other support available for viable projects which are short of the investment they need".