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United Kingdom

United Kingdom

Fighting for a fair deal

Fears that renewables will lose out in the UK's liberalised electricity market were strengthened last month after the Office of Gas and Electricity Markets (OFGEM) revealed its latest blueprint. The proposals follow a year long Review of Electricity Trading Arrangements (RETA), though the input of the renewables lobby to the process seems to have largely been ignored.

The current electricity pool is to be abolished and replaced with market-based trading arrangements more like those used in commodity markets. According to OFGEM, the new system will be geared to exert downward pressure on wholesale prices. Trading will be based on half-hourly periods, with most of it taking place in forwards, futures and short term markets; a balancing mechanism to adjust levels of generation and demand in the light of bids and offers submitted, which will operate from four hours ahead up to the end of the trading period; and a settlement process to pay for-or charge-any energy not covered by contracts.

OFGEM acknowledges its proposals could adversely affect energy from renewables in several ways. The system is geared towards rewarding flexible generation which can bid its output in advance, while unpredictable output-particularly from intermittent renewable sources such as wind-is penalised by imbalance charges. The removal of pool purchase price-against which payments to suppliers for electricity generated under Non Fossil Fuel Obligation (NFFO) contracts is currently calculated-will need to be replaced. Moreover, lowering wholesale prices of electricity could reduce the revenues of renewable schemes that are not covered by a NFFO contract.

OFGEM maintains that the adverse effect to renewable plant from lower wholesale prices may be mitigated by the wider range of options open to them under the new arrangements. But renewable generators' main worries concern exposure to imbalancing charges. OFGEM claims these only need affect renewable schemes that are large enough to be licensed. Moreover, small unlicensed generators-such as wind-will be able to enter into arrangements which will help manage the risks associated with unpredictable output. These could include trading through a third party or aggregating output from single sites under a portfolio operator.

From finance house Impax Capital Adrian Lloyd is unimpressed by this reasoning. He argues that few supply businesses (if any) will want to absorb the balancing charges of any generator, therefore unlicensed generators will have the balancing charges passed back to them by the supplier with whom they contract. "For suppliers to absorb these charges, there will have to be some other reason for wishing to contract specifically with renewable energy generators." He adds that the only sop appears to be the provision for aggregators.

The British Wind Energy Association's David Still stresses that the RETA process is far from over and the job ahead is to convince the government and OFGEM of the need for fair treatment, especially of wind.

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