ECEM: Renewables generators could cash-in on back of wind lull
Clean power projects coming to market under the UK's renewables obligation certificate (ROC) scheme before the end of next year could receive the two-pronged bonus of higher ROC values in 2014/15, coupled with considerably higher wholesale power prices just one year later, latest figures suggest.
The value of a ROC in the 2014/15 compliance period (CP13) could receive a boost if a predicted lull in offshore wind power deployment emerges over the next three years.
But beyond this, a rapid increase in capacity deployment in 2016, when at least two large round two projects are scheduled to reach completion, could dampen the value of ROCs under the market-based scheme.
According to latest figures presented by trade body RenewableUK in June, the UK is set for a major lull in offshore wind deployment over the next three years.
The annual deployment seen last year will not be surpassed until 2016 when 2.7GW is set to come on line, the group's policy director Gordon Edge said at a Major Energy Users Council event in Central London. This year, just 400MW is expected to come on line.
A government-commissioned assessment carried out when the RO banding was last adjusted foresaw deployment of 900MW over the 12 months beginning last April. If the disparity emerges, a premium of around £1.70/ROC would be added to the redistributed buy-out fund (RBF) - the market-based element of a ROC that is set by supply and demand fundamentals - for CP13, according to ICIS ROC numbers.
However a gradual ramp-up thereafter - with 800MW in 2014, 1GW in 2015 and a larger 2.7GW one year later - translates to a £0.18/ROC discount in CP14 and a major £3.06/ROC drop in CP15, compared with the previous impact assessment figures.
This would see the ROC forward curve move into a backwardated shape between CP13 and CP14, because the lull would lift the RBF value for CP13 to what would be a three-year high before it falls back.
"A large number of projects were given out in 2003. We then had to wait until 2010 for the next set, so it's a very big gap," Edge said, in reference to site-leaser the Crown Estate's offshore wind programme. "This is unfortunate when you are talking about ramping up the supply chain. If nothing is happening, then you are expected to go from zero to [2.5GW], that's quite a challenge."
One renewables analyst said: "There's also a degree of construction capacity constraint which could mean round one extensions and remaining round two projects take longer to commission than expected."
The sharp increase in deployment in 2016 will be a year too late to dilute an electricity capacity crunch, with the "pinch point" expected to begin in late 2015 (see sister publication EDEM 5 October 2012).
Clean power generators may then cash in on improved wholesale power prices as the system tightens. The Baseload contract for delivery in Winter '15 closed at £58.10/MWh on Friday, ICIS assessments showed, with the incremental carbon floor partly responsible for a 7% rise compared with Winter '13.
So any clean power project that comes on line before the end of next year could benefit from relatively high ROCs in 2014/15 and improved power prices in 2015/16.
The size of any commissioning gap may depend on how favourable the outcome of the contracts for difference (CfD) negotiations are as the scheme, set around a "strike price", is phased in between 2014 and 2017 to eventually replace the RO. "If the RO regime looks more favourable then some investment will be accelerated to gain RO accreditation," one analyst said. Jamie Stewart
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