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United Kingdom

United Kingdom

An alternative kind of auction

A proposal for modifying the UK's existing renewables support mechanism has been put forward by development company National Wind Power. Some of NWP's ideas are considered in the Department of Trade and Industry's consultation paper on the future of UK renewable energy support. Reforms of Britain's electricity market have led to major question marks over who in future should shoulder the obligation to purchase renewable electricity under the UK's Non-Fossil Fuel Obligation (NFFO)-or its replacement in the liberalised electricity market-and how the cost of the obligation should be calculated. NWP's solution involves separating the value of renewable electricity from the premium price needed to support it.

NWP suggests an annual auction in which electricity suppliers are invited to bid for output from all NFFO generators in specified geographical areas for the next 12 months. Suppliers would bid in the amount of subsidy they would require to buy the renewable output and contracts would be awarded on the basis of "least subsidy required." This system would mean that the price renewable energy commands is not based on some artificial measure of what it is worth, but on suppliers' commercial estimate of its value in the electricity marketplace. Peter Musgrove from NWP explains: "The transparency of the auction process appeals to a lot of people because they will be able to see what suppliers are prepared to pay for renewables. It reflects the green benefits of renewable projects."

Meanwhile, renewable generators would continue to bid competitively for power purchase contracts as under the present NFFO system. As some technologies achieve price convergence, the value of the NFFO contract will lie more in its 15 year index-linked nature, and less in the subsidy. Projects could even receive "negative subsidies"; in other words, where the NFFO contract price is lower than the actual value of the electricity produced, the supplier would pay a premium to buy NFFO electricity at the NFFO contract price.

Under this system the cost of the subsidies would continue to be borne ultimately by consumers, but NWP proposes replacing the present Fossil Fuel Levy with a levy on users of the distribution network. The Non Fossil Purchasing Agency (NFPA), which administers the present NFFO system on behalf of the Regional Electricity Companies, would continue in its current role, but in addition would conduct the annual auction of NFFO output.

NWP would prefer to see its proposal work hand in hand with an obligation on suppliers to secure a percentage of their electricity from renewables. This would allow suppliers two options for procuring renewable electricity: by bidding for NFFO contracts in the annual auction or by contracting direct with non-NFFO generators. A percentage obligation has the added advantage of removing the main area of uncertainty with the system proposed by NWP-which is whether suppliers will want to participate in an auction. A trade in green certificates could provide suppliers with an additional means of meeting their obligation. Musgrove points out that the government's commitment to new electricity legislation provides a golden opportunity to legislate for a percentage obligation.

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