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UK utilities must wait for CfD electricity strike price details

22 May 2012 15:53:05 | edem

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UK energy producers will have to wait until parliament's autumn session to discover the fine print of the government's new incentive regime for investment in renewable and nuclear generation.

The UK government confirmed in the release of its draft energy bill on Tuesday that it will roll out a feed-in tariff (FIT) based on contracts for difference (CfD) for low-carbon generation in 2014. But the bill did not include details of the method to be used in setting a strike price based on wholesale electricity prices.

Under the plan, which was flagged in the energy white paper last July, operators would receive a payment from a contractual counterparty if wholesale electricity prices fall below the strike price, but would have to refund the difference if prices exceed the strike price (see EDEM 12 July 2011).

Energy minister Ed Davey was anxious to hose down speculation that the reforms favoured nuclear generation over renewables. "The problems that nuclear generators face are similar to the problems that renewable generators face - a high upfront capital cost on projects," he told reporters.

Davey added that CfDs would be structured slightly differently for independent renewable generators, with a "firmer guarantee" on the strike price.

The methodology for determining strike prices will be revealed before parliament begins its Autumn session. Draft strike prices will be released for industry consultation next spring, with the final series available in the second half of next year. The minister did not say how long CfD contracts would last, or how far in advance strike prices would be set.

More detail needed - quickly

Business lobby groups said more detail was urgently needed as to how the regime would operate. "With major investors waiting in the wings, these details are needed as soon as possible," CBI deputy director-general Neil Bentley said.

Analysts have warned that the nuclear new-build programme may not attract enough interest, while state aid rules could also pose a problem for the government in establishing a contractual counterparty for the strike price (see EDEM 16 May 2012). In particular, the market-based system favoured by the UK department of energy and climate change (DECC) will rely on attracting more than one nuclear operator (see EDEM 2 May 2012).

Renewable energy groups praised the progress being made to reform electricity markets, but said renewable energy producers must be receive equal treatment as developers of nuclear projects.

The CfD scheme will run in tandem with the existing renewable obligation scheme until 2017. The minister said projects that are approaching a final investment decision would be assisted in the interim as part of an "enabling process." The minister also called for independent renewable generators to come forward and give their views on the proposals.

Reports of delays to the electricity market reform legislation had been hotly denied by DECC (see EDEM 9 May 2012). KB

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