Out-Law / Your Daily Need-To-Know

Proposed 'offtaker of last resort' mechanism would apply to all renewable generation technologies, Government says

Out-Law News | 13 Feb 2014 | 2:35 pm | 2 min. read

The Government has set out the details of its proposed 'offtaker of last resort' (OLR) mechanism, which would provide independent renewable electricity generation projects with a guaranteed 'backstop' route to market for their power.

The Department for Energy and Climate Change (DECC) will now consult on the main design features of the mechanism until 24 March. It is seeking views on which generators should be eligible, which electricity suppliers would be obliged to participate in the scheme and which would be able to do so voluntarily, how the OLR will be allocated and what its terms and conditions would be.

The OLR forms part of the Government's electricity market reform (EMR) programme. It would require certain electricity suppliers to purchase power from eligible renewable generators at below market price if they are unable to agree a commercial contract.

"The proposed mechanism is considered essential to improve the route to market options for independent generators by providing a 'backstop' power purchase agreement (PPA) with an offtaker," said energy law expert Kate Turner of Pinsent Masons, the law firm behind Out-Law.com.

"It should also give some comfort to lenders over project revenues and enable more projects to be brought to market. However, it is hoped that the offtaker market will improve so that this really is only a last resort option given the discount that will be applied against the market reference price in the generator's contract for difference (CfD). It is also helpful that the Government proposes applying the new mechanism to all renewable technologies irrespective of size, rather than just wind," she said.

The Government's EMR programme will be implemented through the Energy Act, and is intended to attract the estimated £110 billion 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.

The CfD, which is the new financial support mechanism set out in the Energy Act, will not carry the same obligation for energy suppliers to source a certain amount of energy they supply from renewables as existing support mechanisms, including the Renewables Obligation (RO). Because of this, some developers have expressed concerns that it will become more difficult for them to obtain long-term PPAs, which allow generators to offset some of the risks of the project onto a counterparty in exchange for cheaper guaranteed electricity. The new OTR mechanism is intended to address this risk.

The consultation proposes that developers that have obtained a CfD contract but are unable to enter into a PPA could use the new mechanism, through which large-scale electricity suppliers would be required to bid for supply contracts. Smaller suppliers could also bid into the market if they chose to do so. Electricity prices on offer through this mechanism would be discounted by between £20 and £30 per megawatt hour (MWh) compared to the market price, and contracts entered into under the scheme would last for a minimum of six months.

According to the consultation, contracts under the new scheme would not be available until 2016 in order for secondary legislation to be enacted and market regulator Ofgem to make the necessary arrangements. However, energy law expert Kate Turner called on the Government to finalise these details as quickly as possible.

"There are already concerns that with access to backstop PPAs not becoming available until 2016, any further delay could result in a hold-up of investment decisions for those smaller projects that are not seeking support through the existing RO," she said.