ECEM: UK renewables obligation to cover ‘almost all’ new capacity to 2015

23 December 2013 18:24 Source:ICIS

Renewable power generation capacity commissioned in the UK up until 2015/16 “will almost all be under the RO [renewables obligation] scheme,” a government-commissioned report published in December suggested.

Such strong uptake would increase the structural stability of the market by making it more capable of absorbing supply-side shocks and neutralising “swing factors”, for example, sustained periods of very strong wind speeds, or the late commissioning of a large single unit of renewable capacity.

Earlier this year, the UK’s Department of Energy and Climate Change (DECC) commissioned an independent panel of technical experts to look into delivery of the government’s flagship electricity market reform programme.

And the panel’s report, published this month, cited evidence from DECC’s own “dynamic dispatch model [DDM]” – an in-house mechanism used by the department to analyse policy impacts in future scenarios – which pointed towards the RO uptake rate.

In 2017 the RO will close to new capacity, to be replaced by a contract for difference (CfD) model. The CfD is the cornerstone of DECC’s market reform programme, and the centrepiece of the energy act, which became law just days ago.

For the 2014/15 to 2017/18 RO compliance periods (CP13 to CP16), new capacity will be able to choose between the two support systems to attract investment.

“For these investors, the strike prices for CfDs are intended to be as attractive as ROCs, and the DDM takes as its assumption that the hurdle rates [a practical measurement of risk] for the CfDs will deliver this parity, based on the evidence they have assembled,” the panel’s report said.

“It therefore assumes that renewable plants commissioned in 2015/16 will almost all be under the RO scheme, but that from 2016/17 all new plants will be under CfDs.

“The exact division between these two forms of support is hard to model, and so DECC accepts this as a reasonable assumption that will not materially affect support costs, the LCF [levy control framework] and [electricity] wholesale prices before 2020,” the panel concluded.

In 2014, most recent figures suggest that some 2.3GW of new renewables capacity will come on line, with more than half – 1.4GW – accounted for by wind power. This 2.3GW would be a 14% rise in total capacity.

Drax Power plans to bring its second giant 585MW coal-to-biomass conversion unit on line next year, although it has already confirmed to ICIS its intention to secure a final investment decision enabling contract under the CfD model ( see ECEM 24 October 2013 ). A strike price of £105/MWh (€125/MWh), around which coal-to-biomass CfDs will hinge, was confirmed this month by DECC.

When Drax Power confirmed its intentions in October, a spokeswoman said: “The economic choice between the two [support] regimes is finely balanced. The CfD has other benefits in terms of reducing risks, particularly political risk.

“Provided the coal-to-biomass price is confirmed at £105 (€125)/MWh and the contract terms remain acceptable, we think it would be a good option for us.”

The most recent news indicates the market will indeed see a more attractive hurdle-rate in CfDs, although this will not be reflected in choices taken by new capacity until further into the two regimes’ parallel existences.

The 2014/15 RO, covering CP13, has been set by DECC at 72.3m ROCs using the headroom calculation. This was up from 61.5m ROCs in CP12, a 18% increase. This would back a 14% rise in capacity, allowing for a year-on-year increase in load factors.

The following year, in 2015, an additional 1.6GW of renewables capacity is expected to be commissioned.

Should “almost all” of this opt for support under the RO, the impact will not necessarily be bullish or bearish for ROCs. This is because DECC makes its headroom calculation, which defines the recycle value of a ROC, six months in advance, and therefore it should account for all projects that are expected to enter the scheme.

However, the higher the capacity under the RO, the more stable the market should become, because the larger it is, the more able it will be to absorb major supply-side swing factors. Jamie Stewart

By Jamie Stewart