The year ahead – a 2024 Clean Energy preview

Solar, both ground-mounted and rooftop, will continue to be built in the UK in 2024. 2023 was a bumper year for rooftop solar installations and the announcement in the latter part of 2023 regarding the relaxation of planning rules for rooftop solar installations is anticipated to be a catalyst for the continuation of this upward trajectory in 2024. The favourable policy environment and the clear demand for such installations in the UK have piqued the interest of European companies, who have sought to make tracks in the UK market.

Investment in ground-mounted solar will continue in 2024 and we anticipate that more Nationally Significant Infrastructure Projects (‘NSIP’) will come forward in the next 12 months. Whilst such projects require significant upfront investment (with no certainty over the anticipated outcome), and take longer to come to fruition, their scale means that the anticipated return on investment is likely to be greater than for smaller scale projects. As the cost of capital and the interest rate on borrowing continues to increase (although forecasts suggest interest rates may start to fall later this year), solar assets need to perform better in order to achieve a satisfactory return on investment (and this may in some instances require larger scale projects to make this happen).

Investment in battery energy storage systems (“BESS”), both grid-scale and ‘behind the meter’, will also continue in 2024, even though 2023 saw a considerable reduction in revenues (when compared with 2021 and 2022). Interestingly, this is not perceived as a market anomaly, but as an anticipated consequence following the high returns of the previous two years. It remains to be seen how BESS will perform financially in 2024. According to research by Modo Energy, in January 2024, average revenues for BESS fell by 24% compared to December 2023.

We anticipate that more truly co-located assets will come to the fore. We have discussed the issues around co-location in our recent article [Co-location of battery storage assets: creating value for clean energy projects | Foot Anstey] – the key take-away is to ensure optimal technical configuration of the two disparate aspects of the project and to choose an optimisation strategy (and optimiser) wisely. It appears that the industry has all but settled on a primarily AC coupled model for co-located solar PV and BESS systems  – this consensus should lead to better access to funding for such projects.

But of course, all will not be rosy in 2024. Grid connection delays and uncertainty over grid connection costs will continue to affect the sector.

March 2023 saw the introduction of the ‘Two-Step Offer’ connection process for new connection applications. This process was intended to run for a 12-month period, which will come to an end on 1 March 2024. Applicants will therefore shortly be receiving their ‘Step Two’ offers, which will detail the proposed connection date and anticipated costs. We expect that not all ‘Step Two’ offers will be accepted, which may mean that some grid capacity is released.

December 2023 also saw the introduction of a queue management system in the Connection and Use of System Code (“CUSC”), which was intended to remove ‘zombie’ projects from the queue. We have commented on the issues associated with the proposed system in our article Grid Connection Reform – A legal view | Foot Anstey. We are not aware of any decisions to terminate existing grid connection offers under this new system, but we are aware that distribution network operators are becoming increasingly focused on projects that secured a grid connection offer a few years ago and have failed to progress in accordance with the agreed milestones.

There have been no new applications for onshore wind projects, between September 2023, when the de facto ‘ban’ on new onshore wind installations was lifted, and February 2024 according to data from the Renewable Energy Planning Database. This is certainly telling of an industry that has lost its faith in the UK government. The Labour Party has promised to “immediately remove the onshore wind ban” so there may still be hope for the sector (anecdotally, more onshore wind projects are coming through into pre-planning). However, approximately 1.5GW of onshore wind capacity was awarded in the UK’s Contracts for Different (CfD) Allocation Round 5 (AR5) in 2023 which was a significant step up from the 888MW of capacity secured in the 2022 auction, so it will be interesting to see what happens in 2024.

2023 saw the first phase of the world’s largest (once constructed) offshore wind farm, Dogger Bank, come online. This was a considerable achievement that was somewhat overshadowed by the fact that offshore wind did not attract any bids in the CfD AR5. Offshore wind projects rely on significant government support due to their costs and long-lead construction timeframes, and without such support they are simply not viable.

For AR6, eligible offshore wind installations have seen an increase in the maximum strike price of 66% (from £44/MWh to £73/MWh), whereas floating offshore wind (FLOW) projects have seen an increase of 52% (the maximum strike price is £176/MWh). Additionally, interested parties will be pleased to know that offshore wind will have its own separate pot, in recognition of rising supply chain costs and the need to boost investor confidence. This may have the desired effect of attracting more investment in the sector. We will see further opportunities to develop offshore wind in 2024, including in the Celtic Sea and off the coasts of South Wales and South West England, where there are plans to create up to 4.5GW of renewable energy capacity. In its Autumn Statement in November 2023, the UK Government also confirmed its intention to unlock space for a further 12GW of capacity in the Celtic Sea.

In January 2024 Sizewell C triggered the Development Consent Order (DCO) paving the way for construction to commence, which will go some way towards serving the UK Government’s ambition to have up to 24GW of new nuclear capacity by 2050.

Commentators often compare nuclear plants with other forms of clean energy generation, such as solar and onshore wind, that are cheaper and quicker to build. They argue that nuclear generation has high up-front capital expenditure costs, is heavily reliant on government funding and takes too long to build. However, we do not see this as a like-for-like comparison. Nuclear generation has a key role to play in diversifying the UK’s energy mix, not least by providing a consistent reliable base load of energy that can be supplemented by other forms of more intermittent renewable energy sources. One ought also not to forget about the additional societal benefits associated with projects of that magnitude, including the creation of opportunities for local labour and the establishment of a more robust supply chain.

We also anticipate seeing increasing interest in the development of small modular reactors (SMRs), which are considered to be lower cost, deployable, scalable and investable.

The hydrogen industry remained in its infancy during 2023. However, the conclusion of the first hydrogen allocation round with the award of funding to 11 projects in December 2023 means that a lot more activity is expected in 2024. Applications for the second hydrogen allocation round opened on 6 February 2024 (for those entities that have submitted an expression of interest by 5 February 2024) and interested parties will need to submit a complete application by 19 April 2024.

Hydrogen projects, by their very nature, touch and affect several industries, including the agricultural, maritime, FLOW and aviation industries and we anticipate the emergence of more cross-sector collaborations in this space. This has clear advantages for all parties involved, including access to additional funding streams (in addition to the Hydrogen Business Model) and the promotion of innovation and best practices.