Based on provisional data, the Roc market is now oversupplied for CP13. We have been forecasting oversupply in our Monthly Bulletins for most of CP13, and the release of provisional full-year data shows that Roc issue, combined with the record levels of banked Rocs submitted from CP12, has pushed Roc supply above our forecast Renewables Obligation (RO). We continue to forecast low Roc values for CP13 and the creation of recycle value will require high levels of banking into CP14.
Key to current oversupply is banking from CP12. However, two other factors have also been critical: solar capacity increases and exceptionally high output from Drax's RO accredited stations. This was highlighted in March, with Roc issuance for solar and Drax stations at 1.3mn for the month, over double the 607,000 level in March 2014.
Rises in solar continue to be influenced by the rush of capacity accrediting under the scheme. June capacity data shows 27 5MW+ projects, totalling 273MW of capacity, were accredited in the month, and this rush has been a key factor in pushing non co-fired RO capacity above 20GW. Of the 4.3GW capacity uplift since June last year, 2.4GW (55%) has been solar PV capacity.
Banking on a change- the cycle continues
So where does this leave the market going into CP14? As DECC has already set the RO target for the year, there is little flexibility for Rocs to be absorbed into future compliance periods and the "oversupply cycle", where successive high levels of banking between compliance periods essentially moves on the burden, is set to continue into CP14. Although banking can in part be blamed for oversupply this year, a key reason for successive oversupply trends is headroom setting. DECC has underestimated the impacts of solar accreditation over the last two years, which has been incentivised by policy changes. The rapid increases seen in CP13 are well above previously forecast levels. Experts have also expressed concern over the low load factor assumptions used for offshore wind farms.
This has left less room for the market to absorb increases in capacity and Roc issue as well as reductions in demand, all of which have been on an unprecedented scale in CP12 and CP13. The impact is that high levels of banking are again required to avert oversupply, and it is likely that those suppliers who are significantly long on Rocs will have to bear the financial burden. On our forecasts, similar supplier compliance and banking strategy to last year would see 2.9mn Rocs banked from CP13 into CP14.
DECC may have a chance to avert future oversupply rollover, through setting higher targets for CP15 (2016-17). However it is unlikely that changes to calculations will be made, especially because this could increase Roc prices and push the costs of the RO higher, at odds with recent subsidy cuts on the LCF announced by DECC.