Obligation a powerful price driver

In contrast with most of the UK's electricity market where a large proportion of conventional capacity is in intensive care-renewable energy (wind in particular) is looking at a bright future, said Andrew Perkins from Ernst and Young at the British Wind Energy Association's conference in Brighton. Indeed the short term price paid in power purchase agreements (PPAs) for UK onshore wind are among the highest in Europe, he added.

The market for renewables is being driven by Britain's new support mechanism, the Renewables Obligation. This requires retailers to buy 3% of their power from renewable sources, rising to over 10% by 2010. Retailers who fail to buy enough renewables obligation certificates (ROCs), will have to pay £0.03/kWh to "buy out" of their obligation. This buy out money is then shared between retailers-the electricity suppliers-in proportion to the amount of ROCs bought.

The current high contract prices for renewables give green energy a clear advantage over conventional power in a competitive market. Contract prices are made up of several elements: the wholesale price for the power, the value of renewables' exemption from the Climate Change Levy (which imposes a £0.043 tax on business use of electricity), the ROC price, and the value of the buy out (also known as the "smearback"). Together, the ROC and smearback constitute the value of ROCs. ROC values are particularly high at the moment due to the shortage of renewable power in the market. This is pushing contract prices for renewables as high as £0.065/kWh, said Perkins. He suggested that two of the main factors determining long term prices were access to planning permission and whether targets for renewables will be raised. He adds that ROC prices for short term contracts are forecasted to rise due to a shortage of renewable capacity.

Bog boys favoured

He points out, however, that overall contract prices for wind are variable and depend on the length of the PPA, with short term contracts commanding high values, whilst long term contracts are reduced to only £0.045/kWh. This favours large generators with balance sheet finance. They have no need to tie themselves into long term PPAs, and can instead enter into a series of higher priced short term contracts, he said.

But developers who need to go down the project financing route need to be aware that PPAs and financing are inextricably linked. This is increasingly important in the current market when banks are more and more wary of potential counter party risk within long term PPAs. Advice is needed to make sure that too low PPAs are not accepted just to get easy financing as value will be lost, he said.