OFGEM has backed the idea of giving all or most renewable energy projects so-called contracts for difference (CfDs) as the simplest means of cutting consumers bills. They are right of course, and I supported this idea recently in a blog post entitled ‘How electricity consumer bills could be slashed by reforming the way renewable energy projects are financed‘.
A problem, as some people know, is that at the moment, renewable energy projects financed under the Renewables Obligation (RO) will be paid the (currently very high) wholesale power prices for their output. That is in addition to the value of the renewable obligation certificates (ROCs) that they earn. The renewable companies don’t need all this money but consumers, who have to pay it, do need the cash – very badly. The projects do not have contracts with the Government – they just sell renewable ROCs, to which they are entitled, to the suppliers to help them fulfill their obligations to supply renewable energy.
That’s quite a big deal since RO schemes account for around 20 percent of UK electricity generation. So, instead, the obvious answer is to give them CfDs worth a fixed value that give decent rewards, but not excessive payments, to generators. A decent reward is not difficult to determine. The value of the ROCs is already pretty well determined. Hence a reasonable sum, say £50 per MWh, could be added onto this to pay for the wholesale power value of the electricity in new fixed price contracts. Such contracts, CfDs, could be given to the generators instead of the current arrangements. I calculated this would save the average consumer about £140 a year at recent wholesale power prices.
Unfortunately, a lot of the talk among think-tanks and academics is about developing a system whereby there are separate markets for renewable energy and fossil fuel power sources. Yes, very elegant and conceptual and also complicated. But, as OFGEM comments on page 23:
This would be a novel approach, a significant reform, and would take time to implement. An alternative approach, with potentially faster impact, would be to increase the use of Contracts for Difference (CfDs), which pay a fixed price to low carbon power projects. These contracts essentially already deliver a key benefit of the split market proposal: CfD holders do not receive the marginal price in the wholesale market, but receive a fixed price which, at times of high market prices like now, will pay back to consumers, protecting them from market price volatility. CfDs were first awarded by the UK Government in 2014, but given long lead times for new projects, they are only now starting to account for a significant share of GB power generation, roughly one tenth now, due to rise rapidly through the 2020s
I don’t always agree with OFGEM, by the way (and I don’t like their notions of locational pricing), but their comments above hit the spot as far as I am concerned. Simplicity should come before complexity in this case. I hope this message gets through to Energy Minister Greg Hands in amongst all the chaff!
By David Toke
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