Growing competition for investment in renewable energy projects from the US and the EU, could divert crucial financing away from the UK and hinder its journey to net zero.
According to recent analysis by Cornwall Insight the US witnessed a surge of investment in green projects following the introduction of the Inflation Reduction Act (IRA), which offers financial incentives totalling $369bn for net zero technologies and infrastructure from 2022 to 2032.
Cornwall Insight’s report, “Race to net zero: Rebuilding Investor confidence in the UK”, highlights the impact of subsidy and policy schemes worldwide, such as the IRA and the EU’s Green Deal Industrial Plan (GDIP), which could give these regions a competitive edge over the UK.
With a limited global pool of renewable investment, this could cause significant damage to the UK’s net zero plans, especially with challenges like rising inflation, supply chain disruptions, and labour shortages already hindering investment.
The UK government has announced short-term changes to its renewable investment incentives.
With the Contracts for Difference (CfD) sixth Allocation Round (AR6) due to begin in 2024, the government has raised Administrative Strike Prices (ASPs) – the maximum Strike Price a technology can achieve – the government hopes to regain interest and competition in the scheme.
Despite these adjustments, uncertainties persist regarding long-term reforms and the suitability of the CfD.
The government is exploring reform options through the Review of Electricity Market Arrangements (REMA) to create enduring market structures for a fully decarbonised and cost-effective electricity system by 2035.
Additionally, it is reviewing features of future CfD rounds, including the possibility of separate pots for specific technology types, as seen with offshore wind in AR6 and the inclusion of non-price factors in the CfD scheme, with the proposed introduction of Sustainable Industry Rewards (SIRs) in AR7, AR8, and AR9.
Jamie Maule, Research Analyst at Cornwall Insight, said: “Once a trailblazer in global renewable energy investment, the success of the Contracts for Difference (CfD) scheme is now challenged by escalating capital costs, low Administrative Strike Prices, and intense global competition.
“While short-term incentives play a role, the enduring incentives in the US and the EU threaten to divert funds away from the UK.
“Right now, the UK is certainly not a lost cause for investors, but it must act clearly and decisively if it is to rebuild investor confidence and maintain progress towards net zero.
“Timely government policies and proactive decisions are crucial.
“Waiting for events, like the lack of offshore wind bids in the last CfD allocation round, is a luxury the UK can ill afford.”