Out-Law / Your Daily Need-To-Know

UK government confirms initial contracts for difference subsidy budget as scheme receives EU approval

Out-Law News | 28 Jul 2014 | 12:45 pm | 2 min. read

Renewable energy projects will be able to compete for a share of over £200 million in subsidies from this autumn after a key part of the UK government's electricity market reform (EMR) programme received EU state aid approval.

An indicative £50 million will be made available to pay for contracts for difference (CfDs) with 'established' renewable technologies, including onshore wind and solar; while a further £155m is budgeted for less established technologies. Additional funding will also be made available for biomass conversion projects. Contracts will be allocated competitively within each technology group until all funding is allocated. The first CfDs will be allocated to developers in October and begin in April 2015, according to the Department of Energy and Climate Change (DECC).

"Our plan is powering growth and jobs as we build clean, secure energy infrastructure for the future," said Ed Davey, the energy secretary. "By radically reforming the electricity markets, we're making sure that decarbonising the power sector will come at the lowest possible cost to consumers."

"Average annual investment in renewables has doubled since 2010 – with a record-breaking £8 billion worth in 2013. These projects will create green jobs and green growth, reduce our reliance on foreign-controlled volatile energy markets and make sure billpayers get the best possible deal," he said.

According to DECC, around £1 billion will ultimately be made available for larger scale renewable energy projects, including carbon capture and storage (CCS), up to 2020-21. At least a further £50m is planned for a further auction round in 2015, it said.

CfDs will replace existing incentives for renewable energy generation such as the Renewables Obligation (RO), which will be phased out entirely by 2017. The contracts 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. Payments will be calculated with reference to a technology-dependent 'strike price' and a market reference price, and places within the scheme will be allocated to those more established technologies that bid for the lowest strike price below the maximum.

The government is including onshore wind, solar photovoltaic (PV), energy from waste with combined heat and power (CHP), hydro, landfill gas and sewage gas within the 'established' technology group at the start of the scheme. Projects using 'less established' technologies will not be expected to compete with these on price, but will be grouped together so that any remaining budget may be allocated to another technology if one does not deploy at the expected level.

Approving the scheme, the EU's competition commissioner Joaquίn Almunia said that it was "a fine example of how to promote the decarbonisation of the economy with market-based support mechanisms, at the lowest possible cost for consumers". The Commission has also found that early CfDs worth £97.bn, granted to five offshore wind farms under final investment decision enabling contracts, was in line with the state aid rules.

Separately, the Commission has also given state aid approval to the UK's proposed capacity market, another important aspect of the EMR programme. The capacity market will allow operators of new and existing power stations, electricity storage and capacity provided through voluntary demand reductions to bid for a share of a steady, predictable revenue stream four years in advance of that capacity being needed. The first capacity market auction, for 50.8GW of a planned 53.3GW of capacity, is due to take place in December to cover the winter of 2018.