The UK government’s decision to increase the maximum price it will pay for renewable energy at the country’s next capacity auction is “good news” for the industry, analysts concur.
Power producers and renewable energy investment trusts are expected to benefit from the “surprise” decision this week to raise renewable energy price caps, which followed an emergency consultation with the industry after the last offshore wind auction failed.
The government announced on Thursday that it would raise the price threshold for bids under the next round of renewable energy auctions that is due to take place in 2024. Next year’s auction for ‘contracts for difference’, which lock in a fixed price for renewable power, will be the UK’s sixth allocation round (AR6) for renewable energy to date.
The decision to raise the maximum threshold for CfD strike prices, the fixed price that operators are paid to supply electricity, followed a parliamentary consultation with energy companies after developers argued the cost of inflation made the prices on offer this year unfeasible.
The maximum price the government will pay for offshore wind power will rise by 66% to £73 per megawatt-hour of guaranteed electricity, up from the £44/MWh on offer in 2023. The price cap for solar power has been raised by nearly a third from £47/MWh to £61/MWh. Geothermal strike prices will rise 32% to £157/MWh and tidal by 29% to £261/MWh.
“We never doubted the UK government's commitment to offshore, although the move makes the UK's ambition in this area clear,” James Brand, an analyst at Deutsche Bank Research Europe, said in a research note on Thursday.
“Therefore we see a favourable backdrop for both networks and renewables in the UK.”
Producers
Power producers such as SSE PLC (LSE:SSE), which plans to bid to develop renewable power capacity at next year’s AR6 auction, could benefit from the increase to the price threshold.
SSE operates two business lines, involved in both the supply and production of electricity through its subsidiaries SSE Renewables and SSE Energy Solutions.
Stephen Wheeler, managing director of SSE Renewables, said in September that the project developer was “readying our project portfolio to competitively participate in a reformed AR6”.
It plans to expand capacity at Scotland’s largest offshore wind farm, Seagreen, through a 500MW extension (1A), and is proposing to build the 4.1GW Berwick Bank offshore wind project in the North Sea’s outer Firth of Forth.
SSE has also begun consultations for the 504MW North Falls project off the coast of England that it is developing alongside RWE (ETR:RWE).
Wheeler has called for the UK to extend the length of CfD contracts to 20 years in line with Denmark and the US and provide capital allowances for investment that could help reduce the cost of projects.
SSE Renewables has a portfolio of about 4GW of onshore wind, offshore wind and hydropower power projects across the UK and Ireland.
Analysts at Deutsche Bank expect that the lift to the maximum price the government will pay for renewable power will lead to an increase in the power company’s compound annual growth rate (CAGR), raising their share price expectations for the company.
“There was more good news, with the UK government lifting significantly the Administrative Strike Prices (price caps) for the 2024 renewable auction,” analysts at Deutsche Bank’s research arm said on Thursday.
“The high network capex means that SSE should see 13% RAB CAGR over 2022/23 to 2026/27, at the top end of what is available in the sector. Very high annual percentage RAB growth is likely to continue in the years after the plan.”
Trusts
Investment trusts that invest in renewable energy could also benefit from the increase to the strike price cap, which was raised broadly in line with calls from the industry to lift it by 70%.
“Given the usual frugality of the Treasury and other government departments, the surprise is that ministers have moved as much as they have in meeting the industry's suggested subsidy levels,” Stifel analysts said in a research note on Thursday.
While a resumption of new developments does not impact trusts directly, which tend to invest in operational wind farms, it should provide a “pipeline of potential new investment opportunities”, according to analysts.
Analysts at Stifel said in their research note that investment trusts could benefit from the change in as little as a "few years" following the construction of projects under AR6.
One such investment trust is Bluefield Solar Income Fund (LSE:BSIF), which generates income from a portfolio of solar power assets that are in construction and development.
“The listed renewable funds generally avoid investing in wind projects at the development stage given significant risks such as construction delays, uncertain cost outturns, capex financing requirements and zero yield profile,” Stifel analysts said.