Government publishes first 'strike prices' for future renewable energy projects

Out-Law News | 28 Jun 2013 | 11:40 am | 2 min. read

The first 'strike prices', guaranteeing what the National Grid will pay for renewable energy generation, will provide "broadly similar" support to suppliers as that currently provided under the Renewables Obligation, the Government has announced.

It has published details of the guaranteed prices it proposes to make available from 2014-2019 (2-page / 70KB PDF) for onshore and offshore wind, tidal, wave, biomass conversion and large solar projects, one month ahead of schedule. It has not yet finalised strike prices for new nuclear or carbon capture and storage (CCS) projects.

The rates will be governed by new Contracts for Difference (CfDs) with suppliers. These will be created by the Energy Bill, which was approved by the House of Commons earlier this month and is currently before the House of Lords. Costs passed to consumers through their energy bills will be capped under the Levy Control Framework, as previously announced, the Government said.

The Government also provided further details about the first Capacity Market, which will run in 2014 to guarantee electricity supplies from winter 2018. Participants will bid to provide the total amount of electricity that it forecast to be required through an auction, and will receive a steady payment in the year they agree to make capacity available if successful. The cost of these agreements will be met by suppliers, the Government said.

"Developers and investors have been crying out for more details, sooner, and that is what we are giving them today," said Energy Secretary Ed Davey.

"No other sector is equal in scale to the British power market, in terms of the opportunity that it offers to investors, and the scale of the infrastructure challenge. Our reforms will renew our electricity supply, attracting up to £110 billion investment in a mix of clean, secure power and demand reduction, and will support up to 250,000 jobs up and down the supply chain," he said.

CfDs are long term contracts that provide stable revenues for investors in low carbon energy projects, and will be made available for nuclear and CCS as well as renewable energy sources. Payments made under the CfD will be calculated with reference to a technology-dependent 'strike price' and a market reference price. The payments are intended to replace existing subsidies and incentives such as the Renewables Obligation, and will also protect consumers by enabling the system operator to 'claw back' money if the market price is higher than the strike price.

The draft proposals would deliver a steady strike price of £100/MWh to onshore wind projects through to 2016/17, which would fall to £95/MWh for the next two years. Offshore wind projects would receive £155/MWh at the start of the scheme, falling to £135/MWh by 2018/19. Large solar projects would receive £135/MWh in 2014/15, falling to £110/MWh. The strike prices for biomass conversion and hydro generation would remain stable until 2018/19, at £105/MWh and £95/MWh respectively.

"There will be a lot of number-crunching to be done to work out how the returns on the proposed prices compare with the current Renewables Obligation support mechanism, but this is another step closer to being able to work out what the Government's Electricity Market Reform programme will mean for renewable energy," said Jennifer Ballantyne, an environmental law expert with Pinsent Masons, the law firm behind Out-Law.com.

"Developers will doubtless welcome the increasing clarity of government policy which enhances their ability to make informed decisions about future investment programmes from 2017 and beyond," she said.

Further details of the capacity market emerged as energy market regulator Ofgem published an updated assessment of gap between peak demand and electricity supply in the middle of the decade. As a result of gas plant closures and a surge in the use of coal, which has brought forward the point at which some plants will be forced to close under EU environmental legislation, this gap could be narrower than previously expected, it said.

Both Ofgem and the National Grid will now consult on extending the existing arrangements that they use to balance supply and demand in the short term, to ensure that enough power will be available when needed. Possible courses of action could include bringing currently mothballed plants back online on a reserve basis or new incentives for suppliers to respond to flexible demand, the Government said.