Greencoat UK Wind PLC (LSE:UKW) co-head Stephen Packwood talked with Proactive about the UK government's proposed changes to inflation indexation under the Renewables Obligation (RO) and Feed-in Tariff schemes, and their potential impact on investor sentiment and consumer bills.
Packwood said the government is considering switching the indexation from RPI to CPI, including the possibility of applying CPI retrospectively, which would effectively fix current RO levels for the next 9 to 10 years. He noted, “Retrospective changes such that this typically lead to an increase in the cost of capital.”
He warned that these changes could raise electricity costs and harm consumers, especially as energy demand increases due to the electrification of heating, data centres, and electric vehicles.
As an alternative, Packwood pointed to a voluntary Contract for Difference scheme, allowing generators to agree to fixed prices below wholesale levels, which could save around £30 annually per household. He said this would be “relatively fast and relatively simple” to implement.
He also discussed the company's capital allocation strategy, highlighting £220 million in disposals and nearly £200 million in share buybacks, along with debt repayments of over £100 million.
Proactive: Stephen, very good to speak with you today. Why have you made an announcement regarding the RO consultation? What's being proposed by the government?
Stephen Packwood: Well, good morning first, and thank you very much for having us. We thought it was important to make public our view of the RO consultation, given the potential impacts on both investors and consumers. So, by way of background, the government is reviewing the way that inflation indexation applies to the Renewables Obligation and the Feed-in Tariff schemes.
At its outset, both forms of subsidies were linked to RPI, and the government is considering amending the RPI to either just indexing on CPI as of April 2026 or rebasing the indexation to CPI as if CPI had always applied from the very beginning of the scheme. That, in effect, means that the current levels of the Renewables Obligation would be fixed for around nine or ten years, according to the government's own calculations.
Proactive: What's the likely impact of the proposed changes on investor sentiment for the sector and also for consumers?
Stephen Packwood: So we think it's pretty similar to the conversations we were having around zonal pricing under REMA earlier this year and the preceding couple of years. It's likely to be unsettling to investors. Retrospective changes such as this typically lead to an increase in the cost of capital, and we believe that will make the electricity market more expensive and ultimately harmful to consumers as well.
Given that, over the next few years, we expect demand in this country to increase from things like the electrification of heat, data centres, and electric vehicles, we think even a small increase in the cost of capital has the potential to increase bills for consumers. That would go against what the government is trying to achieve here, which is a saving on consumer bills.
Proactive: Are there any alternatives that would help to reduce consumer bills that you would propose?
Stephen Packwood: Yes, absolutely. We want to engage very constructively with the government to find ways that are best not just for investors but also for consumers. In the aforementioned review of electricity market arrangements, where we talked about zonal pricing, there was a consultation around a voluntary Contract for Difference. This is where existing generators could agree to a fixed electricity price below the prevailing wholesale price, mitigating the risk of price volatility.
In turn, that reduction in price from the wholesale level could be passed on to consumers. We believe this has the potential to save around £30 per annum on consumer bills, depending on the exact take-up and structure of the scheme. That, we believe, is significantly more than the current consultation could save. Additionally, there is already a Contract for Difference scheme in place, so the implementation of this could be relatively fast and relatively simple.
Proactive: Stephen, you've also made an update on capital allocation. Can you touch on what you have said today?
Stephen Packwood: Yeah, sure. Once again, we believe that in the alternatives space, UK Wind is leading the way. We've maintained a progressive dividend for 12 years that has increased by at least RPI. In the past 12 months, we've concluded £220 million of disposals at NAV. That has led to us buying back almost £200 million of our shares, adding about 1.7p of NAV per share.
We've also repaid a significant amount of debt – over £100 million. As our current share buyback scheme comes to an end, we wanted to let the market know that we continue to explore further asset disposals. We also benefit from a structurally higher dividend, 1.8 times over the life of the vehicle. The combination of these two factors puts us in a very good position to further progress capital allocation decisions in the best interest of our shareholders.
That said, the board and I are not happy with the current situation we see. We believe the company's attractiveness needs to be improved, and we are resolutely focused on continuing to do the right things for shareholders, as we always have done and always will do.