The White Paper
Yesterday, the Department for Energy and Climate Change (DECC) issued its White Paper on Electricity Market Reform (EMR) together with several accompanying papers, including the Renewables Roadmap. The papers can be found here. The White Paper confirms DECC's policy proposals contained in its earlier consultation on EMR published in December 2010. In short, there are four main elements:
- Feed-in Tariff with Contract for Difference - this is the proposed renewable support mechanism that will ultimately replace the Renewable Obligation (RO) (discussed below).
- Capacity Mechanism - the Capacity Mechanism is designed to protect security of supply. This looks to incentivise generators to be available (but not to necessarily generate). The policy on this is still developing and the White Paper includes further consultation on the design of the capacity mechanism.
- Carbon Floor Price - the policy on this aspect has been developed separately by the Treasury, see our separate e-bulletin on this here.
- Emissions Performance Standard (EPS) - this introduces a limit to the level of emissions, thus discouraging carbon intensive generation. CCS demonstration plant will be exempt from the EPS.
The Feed-in Tariff
The White Paper confirms the proposals to introduce a Feed-in Tariff with Contracts for Difference (FiT with CfD). This will make a payment to generators based on the difference between the electricity price (assessed through a "reference price") and a "strike price". The CfD is essentially a contractual mechanism within the FIT. The White Paper confirms that the model implemented will distinguish between the different types of plant- with intermittent plant (such as wind) being treated differently from baseload plant (such as biomass) in relation to the calculation of the reference price.
The White Paper confirms that the CfD will be "two way". This means that where the reference price is higher than the strike price, the additional revenues will be passed back to the consumer (presumably through payments by the generator to the CfD counterparty).
The White Paper also confirms that the Feed-in Tariff will be paid even if the generator is constrained off. This will be paid as if the generator had run.
Further policy development
There is still policy work to be carried out. The White Paper anticipates that this will be carried out through the remainder of the year, with the final policy being finalised by the end of the year to allow work to begin on the implementing legislation to be started in the first half of 2012. Aspects still to be considered are as follows:
- frequency of payments
- duration of CfDs
- enforcement of contract obligations
- terms for credit and collateral
- payment mechanisms
In short, the details of the FiT with CfD are still in the process of being hammered out. There is no specific consultation on these aspects included in the White Paper, however stakeholders should look for opportunities to influence the development of the policy while it is still being worked on.
What should renewable developers be thinking about now?
From March 2014, generators will be able to opt for the FiT with CfDs or the RO. Developers with new generation due to be commissioned around this date will want to start thinking carefully about whether to be an "early mover" in respect to FiT with CfD or to choose instead to be accredited under the RO. As the details of the FiT with CfD are still under development, it is difficult at present for developers to make an informed assessment on this. In relation to the RO, it is worth looking ahead and considering what a future "fixed price ROC" (a feature of the ROC "vintaging" measures) is likely to mean in practice.
For those who are already generating under a PPA, it would be wise to review the provisions to assess whether or not any "change in law" clause is likely to be activated by the proposals. It is also worth checking whether changes to ROCs under the vintaging measures will undermine the way that the PPA operates in practice.
Finally, the White Paper mentions that the FIT with CfD is intended to mitigate some of the risks to generators from trading directly in the market. The White Paper notes concerns that had been raised by independent generators that poor market liquidity renders trading directly in the market unattractive. The concern of independent generators is that in future, due to the absence of a supplier obligation in a post-RO world, PPAs may only be available on less attractive terms than are currently being offered. 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.
Two points arise from this - firstly, generators are likely to have a need for skilled support where trading directly in the market (e.g. an in-house or outsourced trading capacity) and secondly, this raises questions in relation to BELLA connected generators who are not currently entitled to trade directly in the market. The industry should be pushing for DECC to provide clearer solutions to the offtake issues raised – currently the White Paper acknowledges, yet fails to fully address, the concerns that have been raised.