Government consults on move to competition for subsidies for "more established" renewables

The plans form part of the latest consultation on its electricity market reform (EMR) programme, which deals with how new contracts for difference (CfDs) would be allocated to renewable energy projects. Onshore wind, solar photovoltaic (PV), energy from waste with combined heat and power (CHP), hydro, landfill gas and sewage gas would be treated as 'established' technologies for the purposes of the new system.

Energy expert Simon Hobday of Pinsent Masons, the law firm behind Out-Law.com, said that the change in Government policy indicated by its desire to move straight to auction rounds for the allocation of CfDs was "significant".

"As recently as December, DECC was indicating that First Come First Serve would be introduced for an initial phase, although caveated with statements that this might be a short period or even not at all," he said.

"The move to an auction process directly will have the consequence that the strike prices announced by DECC in the EMR Delivery Plan will become effective caps, with a clear expectation that the actual strike price for any particular CfD will be lower than the published one for a particular technology grouping. Having identified projects which will receive funding under the FID Enabling for Renewables process and other low carbon support already promised, such as the small scale FIT and RO, the announcement brings into focus the limitations on budget available for other projects identified in the Delivery Plan under the Levy Control Framework," he said.

The EMR programme is intended to attract the investment needed over the next decade to replace the UK's aging energy infrastructure and match increasing demand, while still meeting the UK's international climate change commitments. The reforms will implement a new system of financial incentives designed to ensure that low-carbon forms of electricity generation can compete fairly in the marketplace, backed by a 'capacity market' aimed at ensuring that consumers continue to benefit from reliable electricity supplies at an affordable cost.

CfDs are intended to be introduced later this year and will replace existing incentives such as the Renewables Obligation (RO), which will be phased out entirely by 2017. CfDs will provide guaranteed payments to operators of approved renewable generation technology, while enabling the system operator to 'claw back' money when market prices are high. In December, the Government said that it was minded to introduce competition for the more established technologies immediately once the new regime was introduced, both to comply with new EU state aid guidelines and to keep the costs of the scheme within the Levy Control Framework (LCF).

The Government has proposed dividing the budget for CfDs between a group of 'established' and a group of 'less established' technologies, and allocating contracts on the basis of allocation rounds. It proposes "constrained allocation", or competition, for CfDs for at least those technologies deemed 'established' at the beginning of each allocation round. Within this group, CfDs will be allocated to those projects looking for the lowest strike price under the published maximum, with allocation then proceeding to the next cheapest projects in the group until the budget was exhausted.

Projects using 'less established' technologies would not be expected to compete with 'established' technologies on price, but would be grouped together so that any remaining budget could be allocated to another technology if one does not deploy at the expected level. The consultation includes offshore wind, wave, tidal stream, advanced conversion technologies, anaerobic digestion, geothermal and dedicated biomass with CHP within this group.

As some of the technologies included within this group are "still at the demonstration stage and are not currently competing in the mainstream market" the Government said that it was "minded to reserve a minimum allocation of 100MW" until at least 2019. This would apply to wave and tidal stream projects, and would be reviewed in 2019 in line with deployment. Biomass conversion projects and projects located on the Scottish Islands could also be given special treatment, which the Government will "consider further".

"The actual auction process for CfDs has yet to be announced," said energy expert Simon Hobday. "However, assuming the approach will be followed through with rules for allocation being published in March, potential CfD applicants have a new deadline to work to of October 2014 and the opening of the CfD application process."