In her first week in office, the UK’s new prime minister, Liz Truss, announced energy policy changes aiming to make the UK a net energy exporter by 2040 as part of her ‘energy price guarantee’ package.
While her speech was light on renewable energy policy, it did mention measures to decouple renewable power pricing from the wholesale natural gas market with the intention of switching existing renewable power generators – currently supported by renewables obligation (RO) subsidies – onto CfD schemes.
“Renewable and nuclear generators will move onto contracts for difference to end the situation where electricity prices are set by the marginal price of gas,” said Truss in her address to the House of Commons. This will mean generators are receiving a fair price, reflecting their cost of production, further bringing down the cost of this intervention.
Supply-chain pressure
Currently, only a portion of offshore wind projects are on a CfD scheme, which guarantees a strike price for electricity, with developers paying back energy regulator Ofgem when market prices increase beyond the strike price. Opening all renewable energy to the CfD programme does have the potential to reduce consumer prices, but, for UK renewables, it doesn’t remove, and may exacerbate, a number of challenges including the bottlenecks of projects waiting for approval.
And while the CfD regime has brought cheaper clean energy into the power markets, it has placed enormous pressure on the renewable energy supply chain – not only amongst the turbine manufacturers, but also in limiting the opportunity for new local content to compete with established players.
Investment stymied
Through its proposal to introduce wider CfD’s, the ‘energy price guarantee’ risks limiting pricing, which, in the long term, will reduce the upsides to clean energy investments.
And, with some early-stage RO projects set to see support expire in the coming years, we may be running the risk of disincentivising repowering or upgrades of existing projects if prices are struck too low in the longer term.
While the shift to a wider CfD programme is undoubtedly well intentioned, we do run the risk of slowing the rapid build out of more renewable energy capacity – in itself a direct means of reducing power prices by driving higher renewable participation in the energy mix.
A better plan?
As an alternative to a wider switch to CfDs, the UK government could look to rebalance the wholesale price of electricity, bringing renewables and gas prices into an aggregated middle ground. This could secure some wholesale price reduction, enable revenue and profit margins of renewable generators to steadily increase, while subsequently easing some of the pressures witnessed by beleaguered European wind turbine manufacturers.
While electricity prices are at an all-time high, this would be a difficult ‘sell’ to government, which would have concerns as to the equitability of the model. But with some revisions to the ‘pot zero’ CfD mooted, we can find a model that doesn’t risk jeopardising the progress we still need to make on expanding our clean energy supplies.
Not fit for purpose
To a government wresting with reducing consumer prices, CfDs look like an obvious solution. But the hidden cost of having a CfD market is, that while it looks good on paper and brings in new power generation, it may not be the best mechanism to sustain the industry as generators fail to benefit from rises in wholesale pricing. Can we really gamble our hard-fought progress in renewables on a mechanism that is no longer fit for purpose?
Will Sheard is director of analysis and due diligence at K2 Management
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