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UK government asks how future renewables incentives should work

The success of unsubsidized clean power facilities in the country – whether driven by corporate power purchase agreements or selling direct to the wholesale electricity market – has prompted the Department for Business, Energy and Industrial Strategy to ponder whether contracts-for-difference payments will be fit for purpose in the years ahead.

Having confirmed in November that the contracts for difference (CfD) incentives scheme for renewables would be extended to 2035, the U.K. government is now asking for views on how the program might be adapted after this year’s planned auction round.

Suggestions mooted by the Department for Business, Energy and Industrial Strategy (BEIS) include how to taper down CfD financial support to expose generators more to the wholesale electricity market; reducing the length of payment contracts; and applying the subsidy as a price floor, rather than ceiling.

Under the CfD regime, clean power generators agree a strike price, via an auction, which determines the income they will receive from the sale of the electricity they generate. The power is sold on the day-ahead wholesale market and when the market price is below the agreed strike price, the government makes good the difference. When power prices are above the strike price, generators bank the receipts before returning the difference to the government.

Changes

The government has committed to holding the fourth round of its CfD allocation program in “late 2021” and the procurement exercise will see generators, including solar plant owners, compete to secure capacity by offering the lowest strike prices. After that, the government says, it will be time to consider whether changes should be made to how the system functions.

In a potentially worrying sign for investors and project owners, opinion is being sought about how renewables facilities could survive without CfD backing, especially with the deployment of assets such as energy storage facilities, which could supply more flexibility to the grid.

Lessons

With BEIS stating it is keen to learn lessons from the merchant solar and PPA-driven projects cropping up in the U.K., the department voiced concern about ‘price cannibalization‘, which occurs when clean power facilities drive down electricity prices so low investors are deterred from backing future generation facilities.

Such an outcome would leave renewables developers entirely beholden to government subsidy amid the push to attain a net zero energy system by mid century, according to the consultation document published by BEIS in mid-December. For that reason, the energy department is considering how it could expose renewables generators to wholesale electricity prices. Approaches such as using seasonal wholesale prices, rather than day-ahead figures; capping CfD support during periods of low, but positive power prices; and using the CfD strike price as a minimum, rather than maximum level of income have been suggested. Tying the strike price to a carbon value, or revenue level, rather than to the wholesale electricity price, is also under consideration.

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BEIS stressed any initial changes related to wholesale power price exposure would be likely to be limited to better incentivizing the integration of renewables rather than bringing in sweeping changes, and suggested such market forces might make generators more willing to add storage or hydrogen production, and maximize the strategic location and maintenance down times of their facilities.

The fact-finding exercise – which runs until March 8 and, as a ‘call for evidence’ is not bound by the requirements of a more formal official consultation – also asks whether the CfD regime should incentivize grid flexibility services, hybrid plants with a mixture of renewable and storage technologies, projects consisting of geographically dispersed facilities linked as virtual power plants, or overseas assets which could help the U.K. zero-carbon goal. The document also asks whether project extensions or plans to repower generation sites should qualify for CfD support and also moots the possibility of removing part-built projects from eligibility.

Leveling up

Another suggestion is whether the regime should be amended to ensure the optimal geographical mix of generation sites, given the government’s attempts to ‘level up’ the economic performance of the nation outside London.

For once, the BEIS document at least acknowledges the importance of solar in the U.K. energy mix, stating: “As we build back better from the coronavirus pandemic … shovel-ready projects, particularly onshore wind and solar can drive this deployment [of clean power facilities] almost right away.”

Wind is still tagged as the dominant renewable energy source for the U.K. in the 12 low-carbon future energy mixes published in the introduction to the document, with solar accounting for 15, 40, 80 or 120 gigawatts of generation capacity, depending on technology mix and energy demand.

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Source: pv magazine