Investment in UK renewables at a record high, but transition to new subsidies will be crucial, says expert

However, the research by the Renewable Energy Association (REA) and PwC warned that more capital investment would be needed to meet the UK government's 2020 renewable generation targets, as much of 2014's investment was in 'low-load factor' capacity such as solar photovoltaic (PV) projects. Solar power alone attracted £4.5bn, or 45%, of the 2014 total and was expected to form a "substantial" share of early 2015 investment, the report's authors said.

Renewable energy industry expert Ian McCarlie of Pinsent Masons, the law firm behind Out-Law.com, said that the transition to the UK government's new contracts for difference (CfD) subsidy for qualifying renewable energy developments would be "crucial" if the 2020 targets were to be met.

"Despite challenging economic conditions and competition from other markets, this analysis demonstrates that the UK renewables sector has been resilient and an attractive proposition for investors," he said.

"The RO/CfD transition is crucial if one of the key cornerstones of electricity market reform – investment into new low carbon generation - is to be delivered, and time will tell if the CfD instrument delivers the internal rate of return and return expectation for investors. Following the first CfD allocation round, it is certainly the case that many developers are having to re-adjust their sights in terms of risk management and return/value expectations for their early stage project developments, particularly those projects that will not be eligible under the RO," he said.

In the report, the REA and PwC said that the UK's first CfD auction had resulted in a better deal than expected for the consumer, and had enabled more capacity to be delivered within the government's budget. However, the authors said that "policy certainty" beyond 2021 was needed, as investors were becoming increasingly reluctant to engage with project developers that had not yet been awarded a CfD.

In February, 27 projects were awarded CfDs worth over £315 million after a competitive bidding round, during which developers of projects using more established electricity generation technologies were invited to bid for the lowest guaranteed price per megawatt hour (MWh) supplied to the grid that they were able to accept. According to the Department of Energy and Climate Change (DECC), the low 'strike prices' obtained from this process meant that the government was able to support an additional 55MW of generating capacity.

The new CfD mechanism is one of the most significant parts of the UK government's electricity market reform (EMR) programme, through which it aims to incentivise up to £110bn in energy investment over the next decade. CfDs provide guaranteed payments to operators of approved renewable generation technology while enabling the system operator to claw back money when market prices are high. The mechanism replaces existing incentives such as the Renewables Obligation (RO), which will be phased out entirely by 2017.

The UK has been set a legally binding target to have 15% of its final energy consumption needs met through renewable generation as part of the EU's 2020 carbon reduction targets. In addition, 10% of energy consumption from transport will also need to be met through renewable generation. However, the report concluded that no new renewable transport capacity had come online in 2014. Investment in renewable heat, which is subject to a non-binding target, remained low, it said.

"If the historical investment trend continues renewable heat will miss its 2020 sub-sector target, and renewable transport fuels will remain reliant on lower cost imported biofuels," said PwC's director of renewables and cleantech, Ronan O'Regan.

"It is time for a policy rethink on transport fuels if the targets are to be achieved. Otherwise even greater investment will be required in renewable electricity to make up for any shortfall," he said.