Financing Net Zero: A (revenue) cap on UK merchant financing opportunities?

On 13 October 2022, we hosted the latest instalment of our ‘Financing Net Zero’ webinar series. The session, sponsored by Shoosmiths, focused on opportunities and challenges for merchant financed renewable projects amid the current wholesale price volatility.  

In recent years, due to the increasing success-rate and profitability of renewable projects, coupled with the lack of subsidy options for new capacity (only the Contract for Difference scheme remains) prospective generators have been increasingly pursuing merchant financed projects. Looking forward, how will the ‘revenue cap’ for renewable generators and the long-term Review of Electricity Market Arrangements (REMA) impact on merchant financing of UK renewables? 

Joining us for this session were panellists James Wood-Robertson (partner at Shoosmiths), Ross Driver (director at Foresight Group), Victoria Allen (head of onshore renewables development for Scotland at RWE Renewables) and Lucy Dolton (senior analyst, Assets and Infrastructure at Cornwall Insight). Our colleague Daniel Atzori (Research Partner) chaired the discussion.  

In relation to the current high wholesale prices the panellists stressed the need for market stability and certainty. That is, whilst the massive increase in prices was initially beneficial for generators and investors alike, as they were able to recoup some of their COVID-induced losses, they have now massively exceeded reasonable levels. Resultingly, a great deal of uncertainty has been introduced to the market alongside increased government intervention. So, whilst prices and profits are high, the current situation is not as attractive to investment as it first appears. For those investing capital in the market, there is both an acute awareness that high wholesale energy prices will not last forever, and also major uncertainty regarding the scope and scale of any government intervention. 

One such intervention is the ‘revenue cap’ for generators included in the now-enacted Energy Price Bill. Echoing their previous points surrounding clarity, the panellists urged for more communication from the government on the details of the cap scheme, making the point that the UK market is currently ‘reliant’ on leaked figures and unclear government messaging when making expensive investment decisions. For this cap to have any positive impact, it must be outlined in greater detail, a threshold must be set, and it must be explained in relation to the similar EU cap scheme. A lack of clarity places, the UK under threat of subsiding as an attractive energy investment space, potentially losing money to the clearer and more predictable EU market. 

The panellists were also asked by the audience if the ‘revenue cap’ could be considered as the ‘stick’ that makes the ‘carrot’ of the voluntary Contract-for-Difference (CfD) scheme, devised to protect both consumers and generators from volatile wholesale prices, more attractive. There was general consensus that whilst the cap could have this effect on some generators when the next CfD auction opens in March 2023, it was argued that the link between the two schemes was unlikely to be intentional. The panellists also agreed that the voluntary CfD scheme was a good option for future investment stability.  

Looking to the medium- to long-term future, our panel gave their thoughts on REMA and its ability to address the energy trilemma (decarbonisation, security of supply, and affordability for consumers) by 2035. The government was urged to provide clarity about their plans for REMA, irrespective of the avenues they intend to pursue. For instance, a shift from national to nodal pricing could yield benefits – especially for generators in Scotland wishing to distribute power across the UK – but should be outlined in advance. Investors need to understand the government’s plans, what the government models will look like, and how they will affect pricing in practice. If not, we risk scaring off potential or current investors. 

Overall, our discussion emphasised the need for market clarity and stability. Currently those investing in UK renewables are facing major uncertainties in the medium- to long-term state of the market, leaving many in a position where they may not wish to risk their capital, potentially sending them to alternative markets with greater clarity and stability. 

For those interested in finding out more, find attached a link to the full webinar. 

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