Solar project development costs ‘increased by 50% off back of windfall tax and inflation’

The cost of developing solar projects has increased by up to 50% as a result of the Electricity Generator Levy and inflation, Energy UK has said.

Due to the newly introduced Electricity Generator Levy, current inflation levels and supply chain difficulties, costs associated with the creation of low carbon generation projects have increased by between 20% to 30%, with some quoting 50% for specific projects, Energy UK said in its Storms Approaching: How to prevent an investment hiatus in UK low carbon generation report.

Energy UK believes the investment climate for UK low carbon generation has deteriorated significantly in recent months. One of the biggest factors contributing to this is the government’s controversial Electricity Generator Levy, revealed in last year’s Autumn Statement.

The levy taxes electricity generators at a rate of 45%, which covers aggregate revenue generators make above £75/MWh. Generators whose in-scope generation output exceeds 100GWh annually are subject to the levy, which applies only when extraordinary revenues exceed £10 million. This came into force from 1 January 2023 and will be legislated for in the Spring Finance Bill 2023.

Other issues plaguing the UK low carbon generation market include inflation, interest rates, supply chain difficulties, increased competition, systemic regulatory uncertainty and lengthy delays to planning and grid connections, which currently are holding back projects from being developed quickly.

Each of these factors have been detrimental to the UK’s low carbon generation market. Should the UK maintain its current net zero investment levels, the nation will miss its required installed wind and solar capacity by around 54GW by 2030.

Without rectifying these issues and turning the UK into a desirable location to invest in low carbon generation projects, the UK economy could lose out on £62 billion of investment between now and 2030. This could also lead to a shortfall of 54GW of potential solar and wind capacity.

“As we look to emerge from an energy crisis that has caused huge difficulties for customers, businesses and the wider economy, both the Government and the energy industry have been absolutely clear that the answer lies in rapidly expanding our own sources of clean, cheap power and escaping a dependence on expensive fossil fuels that has cost us dearly in recent times,” said Energy UK’s chief executive Emma Pinchbeck.

“However, the UK is in increasing danger of undermining its own ambitions and failing to deliver on its commitments. In many ways, the UK has led the way in the transition to clean energy – witness our world-leading offshore wind industry – but we risk squandering this position and driving the investment that we need elsewhere.

“We are at a pivotal point right now with other countries actively trying to attract the same companies and investors and it would be unforgivably complacent to think that we don’t need to do the same. This is a once-in-a-generation opportunity and if we don’t seize it now, we will miss out not just on cheaper, cleaner energy but on the huge boost to our economy such investment will bring in terms of growth, jobs and other benefits.”