Renewable energy in Wales Contents

3Subsidy schemes and finance

Contracts for Difference and Innovation Power Purchase Agreements

26.The Contracts for Difference (CfD) scheme is the UK Government’s main mechanism for supporting low-carbon electricity generation. CfDs incentivise investment in renewable energy by providing developers of projects with high upfront costs and long lifetimes with direct protection from volatile wholesale prices, and they protect consumers from paying increased support costs when electricity prices are high.31 The CfD scheme has been largely successful in supporting established renewable energy generators throughout the UK. However, it has faced criticism from stakeholders for its limited success in supporting emerging renewable energy generators, such as wave and tidal.

27.Wales has significant potential in this emerging sector with 16 marine energy developers actively progressing projects in Wales and seabed agreements in place for over 362 MW of marine energy sites.32 According to Marine Energy Wales, “Wales has the potential to establish an early mover advantage in an export market worth an estimated £76 billion by 2050, exporting marine energy technologies, skills, knowledge and intellectual property across the globe”.33 However, the costs to support such deployments are higher and represent a difficult challenge to the UK Government in terms of balancing industry development with value to the taxpayer.34

28.Although the creation of a ‘CfD Pot 2’ for emerging technologies as part of BEIS recent AR4 process has addressed parts of the problem, some pre-commercialisation technologies may still experience a funding gap. To address this, emerging technology stakeholders have been advocating for the creation of Innovation Power Purchase Agreements (IPPA). The use of IPPAs would allow a project to sell power in excess of market rates with the additional costs to the buyers reclaimed through the tax system.35

29.The marine energy and emerging sector and a cross-party delegation of MPs met the-then Minister Claire Perry in February 2019 to present their initial proposals for the IPPA. However, because the IPPA is primarily a tax-based instrument any decisions on its adoption subsequently reside with the Treasury. According to correspondence from Minister of State for Energy and Clean Growth, the Rt Hon Anne-Marie Trevelyan MP, the sector is currently seeking a meeting with Treasury Ministers to discuss IPPAs. BEIS has indicated its interest, in principle, in determining whether there could be more effective funding models to support emerging technologies while they bring their costs down to a point where they can compete in the market.36

30.The Contracts for Difference (CfD) scheme has been highly successful in supporting renewable energy development in Wales. However, emerging marine technologies such as wave and tidal require additional support to bridge the gap between innovation funding and CfDs.

31.The UK Government must address the funding gap for emerging marine technologies or risk negatively impacting their development. As a first step, Ministers from Her Majesty’s Treasury, in cooperation and coordination with Welsh Government Ministers, should arrange to meet with representatives from the marine energy sector as a matter of urgency to investigate the feasibility of introducing Innovation Power Purchase Agreements. Such Agreements could provide a powerful catalyst for investment in emerging technologies and help support innovation and development in renewable energy projects.

Feed-in Tariffs to Smart Export Guarantee

32.The Feed-in Tariffs (FiTs) scheme was hugely successful in attracting investment to small-scale renewable electricity generation. The scheme allowed applicants to apply to get payments from their energy supplier if they generated their own electricity, for example with solar panels or a wind turbine. This is called a ‘feed-in tariff’ (FiT). Users would also receive a set amount for each unit (kilowatt hour or kWh) of electricity generated - a ‘generation tariff’.37 As well as the generation tariff, users could also sell any extra units they did not use back to their electricity supplier. This is called an ‘export tariff’. In Wales, the FiTs scheme supported over 50,000 installations which amounted to over 450MW in capacity (made up of 76% solar PV, 17.5% wind and 6.5% hydro and anaerobic digestion).38 On 18 December 2018, the government announced their decision to close the FiTs scheme to new applicants from 1 April 2019.39

33.In their written evidence to our predecessor committee’s inquiry in 2018, the Welsh Government expressed their dismay that the FiTs scheme was being closed to new applicants. The Welsh Government explained that “support services for the public sector and for communities were developing a pipeline of projects, the majority of which were no longer deemed immediately viable following the reductions in Feed in Tariffs”.40

34.The FiTs scheme was subsequently replaced by the Smart Export Guarantee (SEG) in January 2020. There are a few key differences between the two schemes. Notably, the SEG does not financially reward consumers for generating their own electricity and instead they will only receive payment for the excess electricity that they export. Furthermore, the SEG scheme does not have a universal payment amount other than to stipulate it must be above zero at all times. The FiTs scheme, on the other hand, offered the same tariff for all applicants, regardless of electricity supplier and set by Ofgem, and the tariff received was fixed for 20–25 years after installation.

35.For the reasons mentioned above, the SEG has been widely criticised by small-scale renewable energy developers. Robert Proctor, of Community Energy Wales, told us that he did not think it has been “very effective”. According to Mr Proctor, “all it does is ensure that energy companies will buy power from schemes. It is better than nothing. You are guaranteed to have someone buy your power and pay more than zero for it”.41 The Welsh Government has gone further to state that the SEG is “not sufficiently ambitious to sustain the rate of growth in small scale renewables we will need to meet our carbon targets”.42

36.The Rt Hon Anne-Marie Trevelyan MP, Minister of State for Energy and Clean Growth, told us that Ofgem will release an annual report on the provisions later this year. The report will analyse the effectiveness of the SEG scheme at delivering a wide range of competitive options for consumers.43

37.The Feed-in Tariffs scheme had been hugely successful in attracting investment in small-scale renewable energy generation. We are concerned, however, that its replacement scheme the Smart Export Guarantee has been widely criticised by small-scale renewable developers as being too limited in scope and for its apparent lack of ambition. We are also concerned at reports that the roll out of smart meters has been hindered in rural areas due to infrastructure problems and urge the UK Government to work with the Welsh Government to resolve these issues.

38.This is a critical moment for the climate agenda. If the UK Government is to achieve its ambitious net-zero targets, it needs to have a subsidy programme that succeeds in attracting private sector and community investment in small-scale renewable energy generation. The UK Government should therefore, as a matter of urgency, explore re-introducing generation tariffs to the Smart Export Guarantee in order to adequately support small-scale renewable energy generation. As consumers are currently only guaranteed to be paid less than zero, the UK Government should also examine bringing back a fixed tariff to incentivise further small-scale energy generation. The UK Government should report back to us within the next three months on its review of these proposals.