The UK Government has published a draft of its first Delivery Plan for Electricity Market Reform, seeking further views from stakeholders before crucial decisions are made about funding for the UK's low carbon electricity sector over the next 30 years.
The draft Delivery Plan provides supporting evidence for the proposed strike prices for the Contracts for Difference (CfDs) for the renewables sector, announced on 27 June 2013. It also sets out the proposed reliability standard (99.97%) which will be a determinant in the amount of capacity to be contracted for under the new Capacity Market.
Alongside the Delivery Plan, Government has published a new consultation on the Transition from the Renewables Obligation to the CfDs for England & Wales, and separately Government's conclusions and the final legal text of the 294 page Smart Energy Code as part of the Smart Metering Implementation Programme.
While more detail on the CfDs is not expected until August, in this bulletin we highlight points of interest from the draft Delivery Plan and Transition Consultation.
1. Strike prices for renewables follow an "RO-X" approach until 2017
For the first 3 years of operation, the CfDs will sit alongside the Renewables Obligation (RO), the existing support scheme for large-scale renewable generation, with developers being free to choose between them until 31 March 2017. Due to this overlap Government has said that it has followed an "RO minus X" approach for the strike prices for the 2014-2017 period, with the X reflecting an assumption that projects benefiting from the CfD will have a lower hurdle rate of return for financing than under the RO. Government has published its analysis of the risks for renewables plants under the RO regime compared to the CfD to justify this lower hurdle rate (Annex B to the consultation on the draft Delivery Plan).
2. Transmission losses, PPA discounting and shorter-than-project- life contract terms all factored in
In the explanation of the strike price methodology, a comparison is made between the average cost over the lifetime of a plant per MWh generated (the "levelised cost") and the proposed strike prices. In comparison to the levelised costs, the strike prices are increased to account for transmission losses, the expected discount to the reference price achieved under the generator's power purchase agreements (PPAs), given as £6/MWh in the example of onshore wind, and the fact that the CfD contract term will be shorter than the expected life of the project. The strike price is reduced by the amount of assumed Levy Exemption Certificate (LEC) revenue (around £5/MWh). It is reconfirmed that actual strike prices will be uplifted in line with CPI inflation.
Government intends to publish an Annual Update to the Delivery Plan in which it would confirm strike prices for renewables for the following 5 year period.
3. DECC is working with industry to address route to market concerns
A key issue for independent renewable generators is the impact of the CfDs on their route to market. Government is working with industry to develop a voluntary code of practice and a sample long-term contract (PPA) in an attempt to assist with the transition away from the ROC market. Further detail on this is expected to be published shortly.
4. Open access to underlying Reports
DECC has provided references to the various reports that underlie the technology cost and deployment assumptions used by it and National Grid that have led to the strike price rates, including reports by Parsons Brinckerhoff on the costs of renewable and non-renewable technologies. The reports can be found on the DECC website here.
5. Four technologies with RO support will not be offered CfDs
Government has confirmed that 4 technologies that currently receive support under the Renewables Obligation will not be offered CfDs, namely:
- biomass co-firing, due to Government's preference for fossil plants to convert fully to biomass (which come within the Biomass Conversions category);
- dedicated biomass, in order to discourage new-build electricity only biomass plants which are considered to be less cost effective at decarbonising than other technologies such as onshore wind;
- standard bioliquids (in contrast to advanced bioliquids which are covered by Advanced Conversion Technologies), on the basis that sustainable waste oils, such as used cooking oil, are better used in the renewable transport sector; and
- geopressure, on the basis that there are no projects currently receiving or seeking support.
Government has confirmed that energy from waste without combined heat and power will not receive CfD support, as is the case under the Renewables Obligation.
6. Renewable Obligation Certificates may convert to fixed price certificates in 2017 rather than 2027
To bring an end to the RO scheme, while allowing existing projects to be supported under the RO (and new projects until 1 March 2017), Government has proposed that the RO market based mechanism becomes a fixed price certificate scheme from 2027 until its end in 2037. However, in response to stakeholder concerns about the impact on change of law provisions in Power Purchase Agreements and the likely depression in the price for Renewable Obligation Certificates (ROCs), Government has in the Transition Consultation raised the possibility of bringing forward the start of the fixed price certificate scheme to 2017, if it has sufficient powers to do so without making changes to the primary legislation that will be enacted in the Energy Bill. While recognising that this will bring forward the disruption to existing PPAs (and associated financing arrangements) Government considers that there could be a benefit in reaching early clarity on the ROC value going forward.
7. Plants which increase capacity may become "dual scheme" plants
In the Transition Consultation, Government has confirmed that where an RO-accredited generating station increases its existing capacity by over 5MW during the transition period it will be entitled to choose which scheme it wishes the additional capacity to be under, and will remain entitled to apply for a CfD after the transition period has ended. If a station has capacity governed by both schemes it will be termed a "dual scheme" plant. It is proposed that such plants will be subject to additional metering requirements.
8. Grace periods for RO participation may be extended
When the RO closes to new plants on 31 March 2017, Government has said that it will retain the levels of support for existing RO schemes ("grandfathering"), and have a grace period where an operator expected to be accredited under the RO but, due to unintended delays, finds itself ineligible. Given the financial implications for investors, Government initially suggested a grace period of 6 months, in effect extending the RO deadline to 31 September 2013. However, stakeholder reactions have indicated that this might be both insufficient and arbitrary. As such Government is reviewing both the length of the grace period and the eligibility criteria.
9. The Capacity Market reliability standard is set at 3 hours per annum
The reliability standard for the Capacity Market is based on the loss of load expectation (LOLE), being the number of hours per annum in which it is statistically expected that supply will not meet demand. The level is proposed to be 3 hours per annum, which translates to a system security level of 99.97%, and is based on a value of lost load (VoLL) of £17,000/MWh. While the reliability standard is intended to be enduring, DECC has confirmed that it will review the standard every five years. The standard proposed is the same as that in France, but differs from both Ireland (8 hours per annum) and the Netherlands (4 hours per annum).
10. Consumers to see bills reduced by £62 between 2016 and 2030
Overall, DECC estimates that annual household electricity bills will be reduced by an average of £62 (9%) over the period 2016 to 2030 compared to what they would have been without the Electricity Market Reform package. The cost of the CfD and Capacity Mechanism to household bills is estimated to be £28 and £13 respectively. DECC's Impact Assessments which were published in support of the Energy Bill, are still to be updated but can be found here.
11. Further details to be published in August and October 2013
The Government's position on the strike prices for nuclear and Carbon Capture and Storage (CCS) projects, together with contract drafting for key CfD terms, is expected in early August. Details of the allocation process for CfDs, which will apply after the initial "first come first served" process, are also expected to be published later in the summer. A further consultation on aspects of the CfD design, or the Capacity Market mechanism, may be published in October alongside draft secondary legislation which will implement the enabling powers that are currently still only at the Bill stage (see our bulletin of 4 December 2012 on the Energy Bill here).
The Delivery Plan for Electricity Market Reform can be found here.
The Consultation on the Transition from the Renewables Obligation to Contracts for Difference can be found here.
The closing date for responding to both documents is 25 September 2013.