UK Budget Unpacked: Offshore Wind, CFDs and Consumer Bills

Intro (00:00):
Welcome to PowerPod, the renewable energy podcast from TGS 4C, a leading provider of offshore wind intelligence. In each episode, we explore the key developments shaping the offshore wind market and bring clarity to the biggest trends shaping the industry and the wider energy transition.

Dan Wiseman (00:10):
Hello and welcome to another episode of PowerPod with me, your host Dan Wiseman, analyst here at TGS4C. In today's episode, I'm joined by my colleague Jordan to go over something that maybe a few of us have heard something about: the UK budget. It's something that we always keep an eye on and listen out on how it benefits us personally year on year. But today we're here to talk about how it's affecting the UK in terms of its renewable energy goals and particularly offshore wind.

So welcome back to the podcast. Jordan, why don't you just introduce yourself and let everybody know who hasn't heard you before, who you are and what you do here in the company.

Jordan May (01:00):
Hey Dan, thanks for having me. So I am the senior analyst in charge of the wind farm subscription, and I am also the UK analyst, and I'm also working on some of our financial development offerings.

Dan Wiseman (01:10):
Excellent. So I think, delving straight into the matter, I think the key question really when it comes to the budget is what are the key policies that are in the budget that relate to offshore wind?

Jordan May (01:26):
Yeah, so there were quite a few this year. There was the changing of the way that the levies on energy are going to work. So they've got rid of the standing charge on gas, and they're going to do the same for electricity. And they also said they're looking to start moving some of these schemes away from levies on consumer bills and into general taxation. There was the claim that renewable energy projects will only receive subsidy if they can lower consumer bills. There was the announcement of a new energy wealth fund.

And there were many other things covered in the budget as well that weren't related to energy or small domestic sort of energy policies.

Dan Wiseman (02:00):
So where you mention the standing charges and the levies and the changes that have happened to them, what impact do they have on offshore wind specifically?

Jordan May (02:15):
It's incredibly hard to know because all the policies surrounding it have been sort of saying something publicly and then saying something else in the written budget. So they've said that they're not going to put any new policy costs, which would include things like CFDs, onto consumer bills until the end of 2027, until there's a new cost control framework. But at the same time, they've said unless it would lower consumer bills or as needed for energy security, of which offshore wind is usually included in those categories.

So there's no clear way it's going to work, but it's quite important for offshore wind that something or the clarity is provided because the way the CFDs are funded is via the green levy on bills. And this is charged to energy suppliers to then pass the cost on to consumers. Energy-intensive industries are given exceptions to this, but in general,

Dan Wiseman:
Right.

Jordan May (02:47):
That is the main way it's been funded over the years. So changes to this are, you know, bread and butter and quite impactful to the way offshore wind works in general and is funded.

Dan Wiseman (03:20):
And of course I mean the funding is important because the UK has quite a large pipeline that it needs to take care of. So when looking at these levies, which offshore wind projects are actually being affected by the higher levy, and how much of their revenue is at stake?

Jordan May (03:40):
It's unlikely anything significant is going to happen, but the only ones that will be impacted are the ones that don't currently have a CFD. So the ones that are looking to enter into allocation round 8 or 9 or even further in the future ones because the new cost control framework will come in after allocation round 8. So it's likely that projects from AR9 onwards are going to start seeing this being impacted, but any existing wind farm will luckily not be affected by this just yet. Although the new wholesale CFD which they're introducing could be a different matter.

Dan Wiseman (04:07):
Okay, and so what mean what does this actually mean for a for AR eight then?

Jordan May (04:10):
For AR8, this means that the only clarity we're going to get is on the day the government released the budget, because everything they've said so far has been incredibly unclear and just left them room to do whatever they particularly feel like. Again, last year the strike price, sort of in the low 90s, came not long after there was a paper published saying there's about £94 per megawatt hour with lower consumer bills, albeit a sort of break-even point.

So we could just get the figure released days before what the strike price could be, and then the government may just aim to be a little bit below that, saying that it's reducing consumer bills and therefore meeting their mandate. It will really depend on the day what the government decides is, yeah, what they decide is within their mandate and within their very murky framework.

Dan Wiseman (05:00):
So you were saying earlier about the wholesale CFT, which, kind of on Facebook, it sounds like quite a novel scheme. I mean, is it as good as it sounds, or are there any sort of issues they have with it?

Jordan May (05:17):
So the wholesale CFD, whilst announced and consulted on alongside the budget, is not a new scheme at all. This was announced sort of April this year. They've just sort of followed up on it now. The scheme would be that existing renewables, not just offshore wind, but offshore wind included, that are currently generating instead of getting their merchant power prices, which is largely controlled, I think, sort of 60- 70 % of the time by the price of gas, would instead be put on a CFD, which would get them eliminated from the energy generation levy, which is a 45 % tax on renewable profits, which is pretty harsh.

It was 45 % in April, and then they moved up to 55. It's a little bit of carrot and stick by the government and quite a lot of stick, but in general this would mean that basically every project in the UK that's renewables would sort of look to switch to this CFD scheme and give a little bit more clarity on consumer bills.

But then again, they said in the budget they'd look to move away from levies on people's bills, and then in the consultation they said they're expecting it to be funded by levies on consumer bills. So it's hard to know.

Dan Wiseman (06:27):
Yeah, and I think it's something that I mean, especially in the sector that we work in, in energy, I don't think it came as much of a surprise to to us to know that they were starting to look at levying consumer bills. is something that we see in other markets as well. So it was only really a matter of time. So with the

The projects that don't have value to consumers, like you were saying before, it's important that they focus on the ones that actually bring some sort of value to consumers. Apparently, the state is going to be able to veto these projects. Is there any more information around this, or is this kind of just the beginning of a plan?

Jordan May (07:09):
There's no information around it in the sense that if you hit the good old control F and search in the budget speech or watch the budget speech or read the actual budget, the word veto doesn't appear in it a single time. It's just appeared in all the headlines since, which is an interesting turn of phrase. He has said that he'll only build renewable projects that lower the cost of energy, but also the curtailment, at least when it's grid-led curtailment where projects physically can't provide power to the grid because the transmission cables can't handle it, but they get paid their full merchant price, and CFD price for not generating was also not mentioned once in the budget.

So it's very hard to know what action the government's actually going to take. Again, a lot of people have drawn conclusions based on little to no information. It's likely they're just going to use the same strike price methodology as last year, I would fully expect. And again, they have grid connection requirements built into the allocation rounds already. So it's more political posturing than it is necessarily facts and any kind of methodology behind it.

Dan Wiseman (08:11):
Yeah, and I think especially when I mean just browsing through LinkedIn and kind of seeing the sensationalist headlines about the budget and the question of, like, could this be the end for UK offshore wind or UK renewables? is something I mean I'm used to 'cause my markets are the US, so media outrage is rife over there. So explain then, because obviously the government wants to kinda have this power to potentially, I would say, veto the projects that don't bring any value to consumers whilst at the same time having the idea of passing the levies on to consumers. How are they going to find that balance between the two of saying, look, we don't want projects that aren't going to bring value to customers, but at the same time, in order to get this running, we need to then pass these levies on to the consumers themselves.

Jordan May (09:15):
Yeah, so we'll see what happens when the cost control framework is released in 2027. But in the meantime, it feels very much like the government is. It doesn't really feel like they're doing much or have much guidance on this. They're stating a lot of things they're going to do. They said they're going to try and break the link between wholesale gas prices and energy prices. But there's not really a clear framework for how this is going to happen. There are ways they're chipping away at it. But when it comes to getting things off consumer bills and when it comes to the sort of veto, there's no framework or guidance really on this. Mean, the administrative strike price methodology has already been released. So we kind of know how the auction is going to work. There's no mention of curtailment or, you know, veto ability, but the Secretary of State for energy security net zero does have the power to just look at the bid stack anonymized by name and then go, well, this is an acceptable price. So we'll just set the budget here to let this price through, and that's probably what's going to happen. Cause that's what happened last year, where they changed the budget drastically up to, you know,  over 1.7 billion for funds- the largest allocation round ever. It's gonna be a lot of government just deciding on the day. There was no information given that allows an actual clear idea of what the government's going to do beyond analyzing history.

Dan Wiseman (10:32):
Yeah, and I think we deal with it every year as well, don't we? Especially when the new budget comes in because there always seem to be new issues and new problems and new hurdles that renewables have in the UK. I mean, with all of this uncertainty and with these additional issues that they're now having to deal with, how does that shape investor confidence in the UK? Is it going to pose any issues for future investments, or are we finding that, you know, things will just stay as they are until there's more clarity?

Jordan May (11:07):
So the investor confidence question is definitely a prevalent issue. So we see in leasing round five, there were only two projects that received bidders, and they had to go and look for a third one after the fact. West of Orkney in Scotland has said that the transmission fees are too high. So until that issue is resolved, they're not really progressing the project or going to bid into allocation rounds.

But on the other hand, a lot of the changes to the budget affect already existing projects, and it's not necessarily negative for them too much because of course they're getting much higher energy prices than they were predicting back in the day because we've seen you know oil go to over a hundred dollars a barrel many many times over the last few years and informing our energy price as well but there's also such a large backlog of projects that are so developed that investors are probably looking to get these built because that's the best way to get returns on their money so I wouldn't expect to see a significant slowdown or even a modest slowdown in the UK going forward especially because projects on the CFD are so well insulated. If there's a change to tax then the CFD gets changed, and the strike price gets changed to cover the change to tax so they make the same amount of profit. It's more the merchant side of things that's at risk, whereas new build projects are very well grandfathered in.

Dan Wiseman (12:15):
Do these issues kind of extend to other aspects of renewables? Things like grid connection. Are these levies going to affect them in any way, or is there gonna be more of an issue of not just building the wind farms now but bringing that power on to shore?

Jordan May (12:36):
I wouldn't imagine it would be too much of an issue. The levies are just a way to collect money from consumers or non-intensive industries and use that to pay for these policies. If it comes off levies, it will just go on to general taxation. There won't really be too much of a difference. It's just the government's now aware that the price of power is out of control, and they need to find any way to take their policy costs off it. Again, policy costs aren't necessarily even one of the highest costs in the cost of energy, but it's something that they can address in the meantime; they can't control the international price of oil and gas.

So I can't imagine I have too much of an impact on grid connection that will still get funding one way or another, but grid connections are of course a massive issue in the UK because a lot of projects were hoping to build a bit earlier. I know there's a shortage of projects starting construction in mid to late 28 and early to mid 29, and the supply chain is definitely going to feel that one, especially for the mobile manufacturers and turbo manufacturers a year later. But it won't be affected by the levy; that's just more of a general market issue.

Dan Wiseman (13:40):
Okay. 'Cause I guess I mean, certainly s i it's something that the UK has to get right, because there are lofty ambitions. Like I was saying before, with the UK, if anybody who's subscribed to our platform kind of looks at how busy the North Sea is. You know, there's a lot of projects in the pipeline. So making sure that what we're offering in terms of subsidies and CFDs is really important to kinda get off to a good start. So what does this mean then for the future? I mean, what should our listeners kind of look out for with any further announcements or kind of future auctions?

Jordan May (14:23):
It'll definitely be an interesting one to see. I can imagine the difference between FIX and floating may be the most prevalent. Of course, FIX is a relatively established technology. It generates a lot of heat, and we do need more power. One of the biggest arguments in the government, of course, is between the Chancellor of the Exchequer and the Department of Energy Security and Net Zero, where the Chancellor wants to build AI data centers because it's a massive cash cow.

Whereas Energy Security and Net Zero are saying, well, we haven't got the energy to do this, so we're going to have to limit it. We see large consultations from Ofgem going on where they say that AI is central to UK security, or not security, sorry, to the UK's economic growth, but we can't deliver it. So we can expect the government trying to maximise the amount of power coming on, but that's largely going to be fixed. If they're trying to cut costs, then there's also the research and innovation side, which will be floating;  may not realize too much. course, a lot of floating is also in Scotland, where they set their target for 40 gigawatts by 2040.

I can't remember if 30 or 40 gigawatts actually, I think it was 40 gigawatts by 2040, but they don't control the funding for that. And then, you know, the next time the allocation round comes around, they start blasting Westminster for not putting enough money up for floating when they're trying to cut the cost on consumer bills. So I think we'll see the growing divide between the established and unestablished side of offshore wind, but I think it's relatively smooth sailing for fixed bottom projects.

Dan Wiseman (15:50):
Excellent. Well, at least that's a positive to take away from it 'cause I know these things can sound pretty doom and gloom. And it's always interesting to kind of get a bit more of an in-depth opinion on what's actually happening in the industry instead of just relying on the tabloid headlines, which can be a bit of a trap at times. So I think that's pretty much everything relating to offshore wind in case we've missed anything at all.

Jordan May (16:24):
And then I think it's a, yeah, I think I should cover everything. The only last thing I have to say is on the wholesale CFD: it'll be a very interesting geopolitical action because projects that already have renewable obligation certificates, which is a feed-in premium, know, an additional bit of money on top of their wholesale costs, these projects will qualify for them as well, which will be two different forms of subsidy and also potentially a tax break as well because of the CFD, so two or three kinds.

The EU bans double subsidization, so if it is found to be that, it may make it harder to send power to the EU or make it harder to work together on energy agreements in the long term. It depends on how this interacts with EU policy. Again, we don't know at the moment because things like this generally will require an investigation or... quite a lengthy approval process under what the UK has, which is the Subsidy Control Act of 2022. We'll just have to see, but there are all other kinds of consequences built up on a mountain of bureaucracy that we're just going to have to see how it plays out.

Dan Wiseman (17:30):
Yeah, it always comes down to politics, doesn't it? I mean, you were saying that, with obviously the EU regulations around double subsidies, is that likely to affect the fact that we see a lot of EU companies in English waters, or is it more just the way that we, as a country, deal with the subsidies?

Jordan May (17:50):
It will, if it impacts anything at all, it will impact our ability to sell power into the European market because the European rules are designed to control access to and from the European market or add on additional costs or taxation where things are deemed to be unnecessary state intervention and oversubsidization. So I wouldn't stop a company like Orsted coming into the UK, but it was about Orsted possibly selling power back to Denmark or to any other country there's an interconnector with.

Dan Wiseman (18:20):
Well, let's hope it doesn't reach that, 'cause we know that Europe, l like the vast majority of markets, have their energy targets. So hopefully it's not a case of us breaking rules by doing what we're doing. But sh for sure, let us know your thoughts and comments on this issue. It's always a big thing. The budget, and I'm pretty sure that we'll probably be sat here next year talking about the same thing and how things have been completely different over the next sort of twelve months. But thank you for joining me today, Jordan. It's been a pleasure talking about the UK with you.

Jordan May (19:00):
Been great to be here. Thank you for having me.

Dan Wiseman (19:05):
And thank you for listening, and join us next time, when I'm sure we'll have plenty more to talk about here at TGS4C.