REA FOCUS FEATURE CfDs
Electricity Market Reform (EMR) in action. The outcomes of the first Contracts for Difference (CfDs) allocation round are now known, and the next one won’t take place for another six months, so now is an excellent time to take stock of where we are
Where are we now? T
CfDs:
he auction process resulted in contracts being offered at lower prices than would otherwise have been the case, which could
save £110million over the lifetime of the contracts, making pleasing headlines for the Department of Energy and Climate Change (DECC). But look beyond the headlines and there is at least one glaring issue. The auction process is at risk of unintended consequences when very few projects bid into one delivery year. We saw this in the outcomes for two solar projects commissioning in 2015/16, which secured contracts, but at a price (£50/ MWh, or below the predicted wholesale electricity price for that year) that most of the industry see as unsustainable. Indeed, these contracts were not signed and the projects will now be barred from reapplying for 13 months. So how did this come about? What is clear is that those projects bid
in a way that maximised their chances of gaining a contract, but were caught out by miscalculating the likelihood of other bids that did not subsequently materialise. This is a result of the way the auction is structured. Bidders make sealed bids, and contracts are awarded based on funds available, starting with the cheapest bids. The winners will therefore have bid a range of prices. The question is what price should the winners be granted? The obvious answer would be that every winner should get what they bid. However this was rejected as it gives a major advantage to those with reliable market intelligence on what everyone else is doing. Instead, the policy gives all the projects the price bid by the most expensive winner.
In theory, this allows everyone to ignore what the rest of the market is doing, and just
50 REview Renewable Energy View 2015
bid the best price they can for their projects. In practice, it encourages some to bid £0.01/ kWh and hope that not too many people will do the same. If they gamble correctly, they get a contract at everyone else’s sensible price. If they’re wrong, they would most likely be unable to bid in the subsequent round, but solar developers may have felt they had little to lose if they’d already missed the boat on the Renewables Obligation (RO).
Review meetings DECC have commissioned a review of the CfDs scheme, and the REA are actively participating in this, holding meetings for our renewable power, waste to energy, marine and solar groups to feedback and submitting online responses directly. It is a bit early for the summer sales, but our ‘shopping list’ is already well developed.
We are also calling for an increase in
the overall budget and improvements to the logistics of contract management, that risk contract terminations before there is an opportunity to put things right.’
Our list includes more frequent allocation rounds as a priority, perhaps splitting the timetable for the different pots, which we believe should be on a six-monthly basis as a minimum; re-examining qualification criteria in the context of the high costs involved in meeting these; streamlining the appeals process so that delays to the allocation process are reduced; a rolling five-year horizon of strike prices and minima (reserved capacity) in the auction for more emerging technologies. The contract terms should also be amended so that solar can benefit from a level playing field. At present it is one of only two technologies that does not have 12 months in which to commission and the milestone requirements don’t reflect the way the sector operates. We are also calling for an increase in the overall budget and improvements to the logistics of contract management, that risk contract terminations before there is an opportunity to put things right. As a simple day to day improvement, there should be a single portal for all information and documents required to enter the CfDs process, to aid understanding and transparency. Please feel free to send us your views on these issues if you have not already done so.
The DECC is keen to stress that any changes to the policy cannot be implemented before the next allocation round in October 2015, due to the election and necessary consultation periods, and would be most likely for the one after that (currently scheduled for October 2016). Like so much else, the outcome of the election will be crucial, but the last thing the industry needs is another set of wholesale changes and prolonged uncertainty.
www.r-e-a.net
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