The Government’s proposed reform of the UK electricity market is aimed at increasing our currently dwindling energy capacity, reducing the impact on consumers and raising investment levels in renewable energy sources. Who could argue that these are all worthy aspirations which deserve widespread support? Unfortunately there are underlying problems within the detail of the reforms as they currently stand. The new contracts being introduced to support investment in renewable and low carbon generators provide a specific example of this.
There are issues here which need to be rectified as they will impact directly on FDs of renewable energy firms and on decision-makers in banks and other investment institutions who provide funding for the renewable sector.
According to The Department of Energy and Climate Change (DECC), the introduction of new Feed-in Tariffs (FiTs) and Contracts for Difference (CfD) are being developed to provide ‘stable financial incentives to invest in all forms of low-carbon electricity generation.’ However, as things currently stand there is still a way to go before this claim will stand up to scrutiny. With a lack of certainty about how these new measures will work in practice, it is far from clear what impact they will actually have on securing funding for the renewables and low carbon energy sector.
Key issues such as duration of the CfD and way in which generators will be paid have yet to be discussed. Due to the tight timescales for implementing this legislation, there is also much work to do done on FiTs with it becoming more and more likely that that the scheme may still be under development during the interim period of 2014 – 2017.
A DECC spokesperson recently said that a key benefit of FiTs is that developers can sign up to a CFD earlier than they would be able to accredit under the current system of Renewable Obligation Certificates (ROCs), thus providing better certainty to secure funding. However it is highly debateable that this is going to prove an attractive enough incentive for developers and potential funders. Indeed, due to the removal of supplier obligations, the concern amongst independent generators is that the market reform proposals may result in Purchase Power Agreements (PPAs) being made available on less attractive terms than they are at present.
The White Paper acknowledges that this is a risk but also indicates that Ofgem's work on market liquidity should help remove some of the current barriers to market. We take from this that DECC is anticipating that there may be a shift in the future towards renewable generators trading directly in the market. However, for some independent generators it is unlikely to be a practical option. Skilled support is needed to trade directly in the market and this is simply not a feasible option for such generators. This also raises questions in relation to BELLA (Bilateral Embedded Licence Exemptable Large Power Station Agreement) connected generators who are not currently entitled to trade directly in the market.
The reforms as they currently stand will not make it practical for small independent generators to participate directly in the market and it’s difficult to assess what impact the removal of the supplier obligation will have on PPAs going forward. This is a source of instability which independent developers and those funding the renewable energy sector will not welcome as it could impact on profit margins, making the viability of some projects less certain.
While those connected with the industry would surely agree with the overall aims of its plans, the Government will need to provide much more clarity on key aspects of their reforms if they are to attract whole-hearted support.