Renewable projects in the UK currently benefit from financial support from the UK Government under the Renewables Obligation (RO) mechanism. The RO mechanism was introduced when the wholesale price of renewable resources was higher than that of fossil fuels.
Since then, fossil fuel prices have increased while renewable technology has improved and the price has fallen. As part of the wider Electricity Market Reform, the government had to consider a support mechanism which did not reward developers with abnormally high financial rewards, as is possible under the RO.
The answer was the Contracts for Difference scheme (CfD), which will be available from 2014. The government hopes that CfDs will encourage the investment required in renewable infrastructure projects, allowing the UK to operate and deliver a secure, low carbon electricity system.
The CfD is a long term, private law contract which will pay developers the difference between the ‘reference price’ (an estimate of the market price for electricity) and the ‘strike price’ (an estimate of the long term price needed to bring forward investment). One of the biggest uncertainties for the market in connection with the CfD was uncertainty surrounding the value of the strike prices. However, draft strike prices were published by the government at the end of last month. These are:
|Technology Type||CfD Support Level/MWh|
The announcement came earlier than expected, with the Department of Energy & Climate Change (DECC) aiming to give the industry early sight of key contract parameters. Ed Davey, the Secretary of State, hopes that the strike prices will “make the UK market one of the most attractive for developers of wind, wave, tidal, solar and other renewables technologies, whilst minimising the costs to consumers” .
The government is to consult on these draft prices by 18 July, when the results of a 10-week consultation, with information on the methodology and analysis behind the draft CfD strike prices will be published. Another consultation on the transition arrangements from the Renewables Obligation, the current support mechanism, to CfDs is also expected at this time in an attempt to ensure that the transition is smooth and straightforward. Final strike prices will be set in December 2013.
It is hoped that the strike prices will help give investors the confidence needed to provide the early investment need for major new infrastructure projects. However, more detail is required since the risks associated with the CfD support mechanism are wider than just the level of support. For example, no confirmation has been provided on whether or not the strike prices will be indexed.
Investors are concerned about several aspects of the scheme, including eligibility (the anticipation is criteria to be met will be as per the Renewables Obligation, but this is yet to be confirmed), revenue risk (will a developer be able to sell the power produced from a development, and at market price?), fuel price and supply, and change in law.
Developers have further concerns in connection with investment delay, support mechanism availability and value reduction – the biggest risk being that an ‘eligible’ project may not receive support at all (or support at the level agreed) due to budget constraints on the ‘pot’ of money set aside for CfD support.
So while the draft strike price announcement is a step in the right direction, and will instil some confidence (indeed, it has already) in the sector with regard to the new CfD support mechanism, there is still a long way to go.
To ensure the level of investment in renewables required to meet the 2020 targets for renewable energy generation the industry would welcome further details on the CfD terms and on the concerns highlighted above. Further detail on contract terms, together with more detail on the allocation of CfDs, is expected in early August.
The industry waits with baited breath.
Keith Patterson is Head of Projects, Energy & Infrastructure with Brodies