Is an onshore wind farm in Scotland investable in early 2025? It is an important question. Clean Power 2030 needs 13 GW of new onshore wind by 2030, potentially 10 GW in Scotland.
Full details, the report and the open source spreadsheet are available via Regen’s website.
My answer, in this ‘open-source’ paper produced with Regen is: possibly! But it depends on your view of what is likely to come next in terms of regulatory and market reform.
Using a basic financial model (fully published alongside the paper) and as far as possible, publicly available estimates of costs and other parameters. I posed the question ‘does a wind farm in the Highlands of Scotland deliver a positive NPV?’ under five different scenarios.
Subject to those assumptions, under existing market arrangements:
✅ Yes, assuming the existing TNUoS methodology continues, optimistic assumptions for the merchant tail, and, importantly, *there is no consideration of negative wholesale / CfD reference prices*
❌ No, if poorer performance is assumed in the merchant tail period (although this is marginal if a 30 year operational life is assumed.
❌ No if reasonable assumptions for a negative CfD reference price are included
✅Yes, if reasonable assumptions for a negative CfD reference price are combined with an enduring cap on TNUoS
I also modelled a zonal market with a zonal CfD reference price. In this case, the answer is:
❌No. Not without mechanisms to replace lost revenue and/or mitigate risk.
But I am not a developer. I don’t know what numbers go into real-world financial models, or what an investment board will make of current uncertainty. Many of the assumptions used are from UK Government sources, but here are some examples of where I think the values used may need to be updated:
- CAPEX has risen in recent years. Maybe the value used here, £1,332 / kW, is too low?
- The hurdle rate used, 5.2%, seems low. BIGGAR Economics Ltd has recently put it at between 6% and 8%.
- How often will the national day ahead wholesale price turn negative in the future, triggering the ‘negative pricing rule’ in CfD contracts?
- What about a zonal market? How often will Scottish zonal prices turn negative? What would be the impact of different re-definitions of the CfD reference price in a zonal market?
I worry that it is difficult to sense check assumptions about investability when there is such a dearth of quantitative evidence in the public domain. That is an issue for all of us, and particularly for those tasked with reforming markets, policy and regulations.
How can we change that?
By sharing our understanding and experience. The paper includes a set of questions. We would welcome your views. Please do comment below this post if you feel able to.
Regen also understands that these views could be commercially sensitive and we are keen to hear from anyone by email who would like to contribute but remain anonymous.
I hope to provide an update in a month.
** Update: the follow up report and updated open source model are now available – see this post for more details **