UK renewables investor cautions against 'revolution' in power market reform

Renewable energy investors might cool to the UK if the new government goes ahead with proposals to comprehensively reform the country's power market, Ross Driver, fund manager at Foresight Solar Fund Ltd., told S&P Global Commodity Insights.

Driver said early signs under the Labour Party are positive, pointing to the launch of state-backed energy company Great British Energy and the move to end the de facto ban on onshore wind development in England. Energy Secretary Ed Miliband also approved three new large solar farms in the new government's first week.

"They could quite easily derail that if they went for a full revolution of the energy system ... because they'd put out so much uncertainty into the market for investors," Driver said in an interview.

The previous Conservative government launched the Review of Electricity Market Arrangements (REMA) in 2022, aimed at lessening the influence of gas prices on power price formation.

At the heart of the review is a proposal to introduce zonal power pricing, under which Britain would be split up into several different price zones to help incentivize more generation closer to demand hubs. Under zonal pricing, areas with high renewables generation and low demand would see lower prices.

An earlier proposal to introduce the more extreme nodal pricing, a model used in the US, was shelved during the consultation stage.

The UK has just six years to achieve Labour's goal to fully decarbonize the power system by 2030. But already two years into REMA, the review is still in the consultation phase.

Locational pricing would take at least seven years to implement in the UK, according to industry estimates, based on similar experiences in Australia, Canada and Texas.

Industry associations RenewableUK and Solar Energy UK agree that a zonal system could create uncertainty in the market, potentially raising the cost of capital for renewables and making it harder for installation targets to be reached.

The groups said in March that projects face "stronger locational constraints" such as planning hurdles that limit the influence of zonal pricing on location choices.

Driver, who oversees the delivery of London-listed Foresight Solar's investment mandate, said the group is generally "ambivalent" on locational pricing.

In fact, the company's more than 700-MW solar portfolio in the UK would likely benefit from zonal pricing, given most of the fleet is in densely populated areas in the south where prices would be higher.

But the prospect of a comprehensive market reform that takes years to implement poses too big of a risk to the UK's decarbonization targets, Driver said, adding that investors will head to other parts of Europe that have similarly ambitious goals.

"The UK doesn't want to be in a position where actually you've got uncertainty around how the market is going to operate as being the biggest blocker to investment, because that would be a real crying shame," Driver said. "If you go and rip up the paper and just start again, we'll be at 2030 and we won't have built anything."

Renewables Obligation 'functioning well'

Another loose end that needs tidying is the government's consultation on fixed-price certificates in the Renewables Obligation (RO), the UK subsidy regime that closed to new capacity in 2017.

The proposal to fix Renewables Obligation Certificates (ROC) prices from 2027 assumes the market will thin out in the latter part of the scheme, pulling ROC values down. ROCs are currently valued at around £60/MWh.

"The fact is, so many projects went through the RO in the end that we don't see any issue here," Driver said. "If the market is functioning well, which it is, there is potentially greater damage in going back and tinkering with it now."

On wholesale power pricing itself, Driver said Foresight Solar's projects had been built on a long run average power price of £40/MWh to £50/MWh in real terms. "That still stands; those prices are predicated on a large amount of renewable build-out, and they work for us," he said.

An expanded budget under the renewables contracts for difference auctions, which was confirmed by the government on July 31, would further support this sweet spot for investors and consumers.

"Most of us would trade away the last few years of high prices for a more certain revenue stream," Driver said.