The ever-evolving market for green power took a new and unexpected twist last month with the removal of Climate Change Levy exemption certificates (Lecs) for renewable generation in the July 2015 Budget. The Chancellor's stated aim was to ensure "UK taxpayers are not subsidising overseas generation" but, as has been well documented, the snap decision will affect all green power plants - not just those located abroad.
The surprise cull of Lecs caused much consternation among utilities, offtakers and renewable generators of all stripes, and introduced a new layer of uncertainty into a market still adjusting to the persistent downward trend in wholesale power prices.Cornwall Energy's latest quarterly Green Power Forecast confirms what many have feared since 8th July - that the perfect storm of cheap power and removal of Lecs threatens to drag the value of Feed-in Tariff (FiT) PPAs into uncharted territory.
FiT-accredited generators stand to bear the brunt of the maelstrom. All generators including those receiving Renewables Obligation certificates (Rocs) are feeling the headwinds, but the comparatively less stable FiT revenues are particularly exposed.Cornwall Energy's analysis shows FiT market benchmark prices have fallen by 13.8% on average since April - a drop of unprecedented magnitude in the 18-month history of our Green Power Forecast report.
The fallout throws into sharp contrast the essential value offered by embedded benefits - an umbrella term that refers to the avoidance of transmission and other charges from connecting to the distribution network. FiT generators in some areas of the UK might now struggle to achieve PPA values above the administered higher export tariff without the added value of embedded benefits. If the market continues along this downward trajectory some generators in areas where embedded benefits are manifestly lower - parts of Scotland, for example - could end up holding PPAs that pay below the administered rate. Now would be a good time to switch or review PPA terms - and not just because prices are falling.
There is a silver lining to the gathering storm clouds. There is now a critical mass of green generators periodically returning to the offtake market as deals come up for renewal, and with record low wholesale prices demand for short term PPAs is high. This in turn is driving competition between offtakers and PPA innovation. Generators seeking new deals are spoilt for choice - both in terms of the number of providers and the types of product on offer. PPA discounts are diminishing and value retention is higher than ever - in some cases as high as 96% or 98% for <1 year PPAs, particularly for more predictable technologies such as biomass and anaerobic digestion.
As wholesale prices slide and the Lec cull bites, some offtakers are looking to offer greater value in other areas of their PPAs to compensate. The longer term picture is looking increasingly murky following the government's proposals to end RO support for onshore wind a year early, and the long term PPA market in particular may well be headed for choppier waters. A prudential review of the rapidly changing seascape could pay dividends before the storm fully hits.