Contracts for difference form a key plant of the government’s Electricity Market Reform. Varying in amount for each form of power generation, they guarantee to pay generators a fixed sum – or strike price – for the electricity they generate.
Today’s figures cover each year from 2014 to 2019 and reveal that some forms of renewables will get the same strike price for that period while others will see the price fall.
For projects with a potential deployment capacity of more than 1 GW, the government plans to pay £155/MWh for offshore wind in 2014, falling to £135/MWh in 2019; Onshore wind will get £100 from 2014, dropping to £95 in 2019, while large solar PV will receive £125 in 2014 and get £110 in 2019.
The government also today revealed details of its proposed capacity mechanism, another pillar of its Electricity Market Reform package.
The government confirmed that – subject to EU state aid approval – the capacity market will be launched next year, with participants such as existing generators and investors in new plant bidding in auctions to provide the total amount of electricity that the UK is predicted to need from 2018-2019.
Successful bidders will receive a steady payment in the year they agree to make capacity available. In exchange, they will be obliged to deliver electricity in periods of system stress or face financial penalties.
Energy Secretary Ed Davey (pictured right) said that “developers and investors have been crying out for more details [on EMR], sooner, and that is what we are giving them today”.
He said the renewable strike prices were intended “to make the UK market one of the most attractive for developers of wind, wave, tidal, solar and other renewables technologies”.
“This will help boost home-grown sources of clean secure energy and enable us to decarbonise the power sector, with renewables contributing more than 30 per cent to our mix by the end of this decade.”
The government’s announcement’s today coincide with the publication of a report by energy regulator Ofgem, which warned that “without action, risks to electricity supply could increase during the middle of this decade faster than expected”.
Ofgem predicted that electricity margins could tighten in 2015-2016 to between around 2 and 5 per cent depending on demand.
Ofgem chief executive Andrew Wright said the report “highlights the need for reform to encourage investment in generation”.
Gaynor Hartnell, chief executive of the UK’s Renewable Energy Association, said the draft strike price list fell short of expectations in its scope.
“The omission of dedicated biomass power from today’s announcement of draft strike prices is striking,” she said. “Given that a cap has been imposed for dedicated biomass under the Renewables Obligation, it is particularly important to get clarity on the government’s intentions for this technology under the CfD regime.
“There are hundreds of megawatts of biomass projects looking to commission under the new support regime and their contribution of clean, baseload electricity will help keep the lights on when the capacity crunch comes.
“This is a technology with a long-term role to play. It helps with the objective of keeping waste wood out of landfill and is a good use for agricultural by-products such as straw and chicken litter. In the long term, when coupled with carbon capture and storage, this technology could actually be carbon negative.
“Biomass has been a mainstay of renewable energy policy since the mid-1990s and over the last few months biomass projects have been encouraged to apply for CfDs. It would be inconceivable and nonsensical for Government to turn its back on this technology.”
Maria McCaffery, chief executive of trade group RenewableUK, was more upbeat.
“The confirmation of levels of the draft strike prices is a welcome step forward in setting out how the long term market is going to work. The levels of the strike prices are challenging but possible considering the reduced time periods that renewables will be supported for under the contract for difference system compared to the Renewable Obligation.”
However, she added that “more details do need to be set out. The most important ingredient remains investor confidence and that will take time to land. The secret is consistent long term support and investors seeing that government is behind renewables and low carbon generation for the long term.”
Paul Massara, UK chief executive of RWE – one of Britain’s so-called ‘Big Six’ power utilities – welcomed today’s announcements but said “a significant level of detail is not yet finalised”.
“This, along with the overall complexity of the proposals and the need to gain EU state aid approval, means significant uncertainty remains.
“Only once the final detail on contract terms and conditions is clear will a full understanding of the impact these proposals will have on potential investment into the UK and on Britain’s energy consumers be possible.”
Katja Hall (pictured right), chief policy director at the Confederation of British Industry, said the renewables strike price and capacity mechanism “will enable investors to take their plans off the drawing board and on to building sites”.
She added: “The Energy Bill’s passage has dragged on long enough – the big task now is to get it on the statute book as soon as possible.”