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UK Government's announcement on renewables subsidy levels emphasises the window of opportunity for large energy consumers seeking to buy green power

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Posted: Wednesday, 11 December 2013 at 17:00

The latest Contract-for-Difference (CfD) strike prices were published by the Government last week. These bring further clarity on pricing at a time when developers, investors and industry have been asking for robust incentives to allow much needed renewables infrastructure to materialise and should be welcomed from a general investment perspective. The positive sentiment, however, will not be shared across all technology sectors within the industry. The finalised strike prices reveal an increase in subsidies (compared to the draft subsidies announced in June) for offshore wind, anaerobic digestion, advanced conversion technologies and dedicated biomass at the expense of more mature technologies (solar PV and onshore wind).


Probably the message communicated most strongly by Government was that support for offshore wind is to be increased. But this won't be until 2018/19 when the strike price will go up by £5/MWh. Technologies that are benefitting from the final strike prices are the less mature ones that are seen to need more support to encourage wider adoption. For example, Anaerobic Digestion and Dedicated Biomass with CHP both see a £5/MWh rise on the draft strike price.


Onshore wind and solar PV tariff levels fall by at least £5/MWh and reduce the attractiveness of these technologies under the CfD scheme. Modelling and market sentiment suggests that even before these reductions, the existing Renewable Obligation (RO) subsidy regime was more attractive than the CfD regime for these technologies. Reasons for this include:

  • The RO benefit is for 20 years (rather than 15 under the CfD) and indexation is under RPI (generally higher than the CPI for CfDs)
  • If developers expect wholesale power prices to rise in real terms over time, they are likely to expect greater total revenues under the RO (from selling ROCs and power) compared to CfDs where total revenues are fixed
  • The Government expects CfDs to reduce financing costs by offering fixed, guaranteed revenues to projects. But it appears that the Government may have overestimated the reduction in financing costs that can actually be achieved under CfDs, especially given various extra risks associated with the allocation of a CfD contract

The preference for ROCs over CfDs will be increased by the reduced strike prices, further encouraging developers to ensure that their projects qualify for ROCs.

"So what?" for large consumers

So what does this mean if you are a large consumer of power? The reduction in CfD prices for onshore wind and solar is likely to lead to a rush by developers to get projects commissioned under the current RO scheme - and they will be looking for equity and/or to sign up Power Purchase Agreements (PPAs) with large consumers as well as the traditional utilities.

As indicated in a previous blog, there is also a time-window now for long-term fixed price PPAs for large consumers. Under the CfD top-up payment scheme, it is unlikely that fixed price PPAs will be as attractive to generators - who will already receive fixed revenues from the market reference price and top-up.

Hence, it is an opportune time for large consumers to consider the commercial, environmental and reputational benefits of PV and wind projects - via investment or procurement approaches. Due to the construction timescales to ensure commissioning prior to April 2017 (end of the RO, possibly later if the Government allows a grace period), projects would need to be selected and contracts would need to be finalised soon. The window depends on the technology selected but could be as soon as 6-9 months from now for some larger projects. Preparation for contracting can take 6-12 months in our experience, possibly longer, so any large energy consumers that are interested in direct PPAs or investments in renewable energy projects should consider putting this at the top of their New Year's to-do list or they could miss out.

Finalised-Draft CfD Strike Prices - DECC December-June 2013 (£/MWh, 2011/2012 prices)

2014/15 2015/16 2016/17 2017/18 2018/19
Onshore Wind -5 -5 -5 -5 -5
Offshore Wind 0 0 0 0 0
Large Solar Photo-Voltaic -5 -5 -5 -5 -10
Biomass Conversion 0 0 0 0 0
Dedicated Biomass (with CHP) 5 5 5 5 5
ACT (with/without CHP) 0 0 0 0 5
AD (with/without CHP) 5 5 5 0 5

Source: EY analysis

Finalised CfD Strike Prices - DECC December 2013 (£/MWh, 2011/2012 prices)

2014/15 2015/16 2016/17 2017/18 2018/19
Onshore Wind 95 95 95 90 90
Offshore Wind 155 155 150 140 140
Large Solar Photo-Voltaic 120 120 115 110 110
Biomass Conversion 105 105 105 105 105
Dedicated Biomass (with CHP) 125 125 125 125 125
ACT (with/without CHP) 155 155 150 140 140
AD (with/without CHP) 150 150 150 140 140

Source: DECC 2013

Draft CfD Strike Prices - DECC June 2013 (£/MWh, 2011/2012 prices)

2014/15 2015/16 2016/17 2017/18 2018/19
Onshore Wind 100 100 100 95 95
Offshore Wind 155 155 150 140 135
Large Solar Photo-Voltaic 125 125 120 115 110
Biomass Conversion 105 105 105 105 105
Dedicated Biomass (with CHP) 120 120 120 120 120
ACT (with/without CHP) 155 155 150 140 135
AD (with/without CHP) 145 145 145 140 135

Source: DECC 2013

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