The cost to consumers of the Renewables Obligation is set to spiral in the coming years after DECC tweaked its methodology for calculating load factors for wind turbines.
The latest quarterly update to Cornwall Energy's Long-term Roc Market Forecastshows RO costs over time will increase significantly compared to baseline forecasts earlier this year. The cost of the RO to suppliers is set to hit £17.59 per MWh in 2017-18 (compliance period 16, or CP16), an increase of more than 12% from that forecast in January 2015, and 9.6% on the July 2015 update.
The reasons for this are several: financial close at the Galloper offshore wind farm will push up Roc issuance; solar farms are rushing to accredit before the scheme closes next April; power demand remains flat; and more biomass RO capacity will come online than expected.
However, the single largest driver for RO cost increases is DECC's decision to uplift and re-categorise load factor assumptions for various technologies in light of fresh evidence from industry that wind turbine efficiencies in particular have increased markedly in recent years.
DECC introduced a "newer build" category for plant commissioned in the last two years, reflecting real world data showing greater efficiencies from technological advances. Offshore wind load factors received the largest boost, from 33.8% to 37.4% for existing sites, and to 40% for "newer" plant with turbines rated at up to 6MW. Newbuild sites with turbines greater than 6MW are expected to hit 47.7%. Onshore wind load factors were modified by region and now range from 25.9% to 32.8% depending on location and plant age.
Wind accounts for almost two-thirds of all Rocs issued so changes here will always have a profound impact on market outlook. From CP16 onwards, uplifted wind load factors add 3.8m more Rocs to the market each year, at an annual cost to the Levy Control Framework of around £50m.
More Rocs means a much larger supplier obligation. The target size of the RO is set at 0.290 Rocs per MWh in CP14 (2015-16), rising to 0.348 in CP15 using the headroom mechanism. This constitutes a 20% year-on-year rise, the steepest since the inception of the RO, and is something of an early Christmas present for generators, who can expect higher Roc recycle values over the longer term as a result. Cornwall Energy predicts maximum Roc prices to rise from £44.30 in CP14 to £48.70 from CP15 out to CP25 (2026-7).
Roc prices are depressed in the short term due to oversupply in CP14, which itself partially stems from DECC's historic underestimation of wind output. While the load factor changes will not impact CP14, it is expected to eliminate concerns of oversupply in later periods and allow Roc banking to be more easily absorbed from CP15 onwards.
Although many observers, including ourselves, predicted that something had to give to avoid oversupply prompting a collapse in the Roc price, few expected the intervention to come from the side of government considering the cost implications. DECC knows only too well that the Levy Control Framework is overspent and a more costly RO leaves less in the pot for any future Contracts for Difference auctions. Moreover, consumers will have to pick up the tab for ballooning RO costs sooner or later.
The timing of DECC's intervention is curious in the context of Energy Secretary Amber Rudd's imminent new energy policy strategy that, according to reports, will be designed around generators' ability to "compete in a market" rather than their "ability to lobby for subsidy". By default or design, her department's welcome market correction comes in direct response to "stakeholder feedback" - some might call it lobbying - and will stabilise generator subsidies for the next ten years or so, heaping the extra costs onto consumers. The irony is palpable.