UK eyeing year-ahead index for settling baseload CfDs
The UK looks certain to use a year-ahead index as a reference price against which to settle baseload power generation contracts under its new subsidy scheme for low carbon generation.
But it emerged on Thursday that the department of energy and climate change (DECC), which had planned to source the price from regulator Ofgem's proposed mandatory auction, may now be forced to source it from elsewhere with the auction looking increasingly unlikely.
The reference price is vital to the future development of the UK's baseload power supply. It will apply to all low-carbon forms of baseload capacity as defined under the long-term feed-in tariff with contracts for difference (FiT CfD) regime.
This includes all next-generation nuclear plants such as EDF's 3.2GW Hinkley Point C, three of the 645MW converted biomass-fired units at the giant Drax plant and all future carbon capture and storage equipped coal- and gas-fired plants.
According to DECC, the move would go some way to boosting liquidity on the forward curve because generators would be incentivised to sell into the three forward seasons to qualify for the CfD subsidy.
DECC economics head Neil Bush confirmed the position at the City & Financial electricity market reform conference in Central London.
"With regard to baseload generation we are minded to use a forward price index such as a year ahead price," he said.
FiT CfDs will allow generators to sell output from low-carbon baseload generation sources into the wholesale market. The generator's return for this volume will be determined by a stable, pre-set strike price.
The year-ahead index will then be used to determine payments under the CfD.
If the year-ahead index falls below the strike price, generators will be refunded the difference for the volume of power they have sold into the year-ahead delivery window from a government-owned counter-party to be established under the energy bill.But should the year-ahead index climb above the preset strike-price, the generator will be required to refund the premium to the counter-party.
DECC alluded to the year-ahead instrument when it published its FiT CfD draft operational framework last November.
At the time, it was considering using Ofgem's proposed mandatory auction - an interventionist proposal to boost liquidity on the forward curve - as the reference price source for the baseload CfD.
But Ofgem has since gone somewhat cold on its mandatory auction proposal - although it has been at pains to point out that the auction is still a possibility, albeit far less probable that at this time last year (see EDEM 5 December 2012) - which means DECC may now be forced to explore alternative reference price sources.
"We are working with Ofgem and others to determine exactly what the most appropriate source is for that," Bush said. JS
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