ECEM: ROC oversupply could extend beyond 2015 – UK analyst

The UK’s renewable energy subsidy model is struggling to cope with oversupply partly triggered by shifts in government policy, latest figures show.

And the weakness, which has forced renewables obligation certificate (ROC) values to sustained lows and has already caused “significant concern” among market participants according to a government consultation, is set to continue into 2015 and beyond, analysis suggests.

Chronic oversupply has been a feature of the RO in general since the market crashed in early 2012 amid weak demand for electricity, while the pool of capacity accredited under the system reached a point that began to test its vulnerability to forms of power production with variable generation patterns.

But government solar policy has exacerbated the issue in recent months, with ROCs regularly changing hands at a discount to the recycle value – a figure that should act as a guaranteed minimum price per ROC.

The RO will be phased out to new capacity by 2017 in favour of contracts for difference (CfDs), which offer a set income, removing the market-based volatility for generators, while also removing the downside risk – as well as any upside risk – for participants.

Between October of this year and 2017, developers will have the option of either the RO or CfD models, with the caveat for solar developers that the choice of scheme will only be open until April of next year, after which CfDs are the only option.

But one analyst said on Tuesday the new system would stir little interest among the solar sector: “I can’t see any solar developers building for the CfD,” he commented. “The risk of not being awarded a contract is too great. Hence we are likely to see a large increase [in RO solar] this year.”

The Department of Energy and Climate Change (DECC) set the renewables obligation for the ongoing compliance period (CP13) last October, six months prior to the period, which began on 1 April, as it is required to do by law. However, the decision to close the RO to large-scale solar, defined as projects in excess of 5MW capacity, was not made until May of this year ( see sister publication EDEM 14 May 2014 ).

“It is likely that when it was set, PV [photovoltaic] accreditation under the RO was around 300MW,” one analyst said. Yet, according to Ofgem figures, 625MW of solar generation capacity was registered under the RO in the first quarter of this year alone ( see UK comment ), which brought the total under the system to 1.1GW. And in the four months since, it will have pushed considerably higher.

“Forecasts for the end of this compliance period are conservatively put at 3GW,” the analyst continued. “It is unlikely the majority of this was factored in, particularly as the solar closure from the RO was announced after this was set. This potentially results in 1.5 million extra ROCs that were not forecast.”

The issue now faced by an already oversupplied RO is that, if developers target it as opposed to the CfD programme – as the market suggests they will – oversupply looks certain to carry over into CP14 unless DECC can foresee how much capacity developers can squeeze in before the cut-off.

DECC however retains confidence in the RO structure: “Since 2002, the renewables obligation has successfully brought on more than 16GW of installed renewable electricity capacity. Overall, our projections for the obligation have been accurate, and we deliberately allow 10% headroom to account for unforeseen generation and to provide relative stability to the ROC price,” a spokeswoman said. “However, we are expecting more ROCs to be generated in 2013/14 due to last year’s exceptionally bad winter [which resulted in freezing weather conditions in April and May].” Jamie Stewart