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Winds of change: Time for a policy rethink?​ ​ ​ ​


For those who follow energy market developments, this week was a good one for shock and awe. The latest contract for difference (CfD) auction, which enables a bankable long term revenue stream for investors, out turned at prices significantly lower than market expectations. Most newsworthy, offshore wind cleared at a price of £57.50/MWh for delivery in 2022-23 and £74.50/MWh for delivery in 2021-22, but energy from waste and biomass were all successful at these prices.

Shock and awe, was a similar story for the last T-4 capacity market auction run in December 2016, which out turned materially below market expectations at £22/kw/year. Lower prices than anticipated are becoming a theme.

The clear messages that can be derived from both auctions are:

- Technology costs are falling far faster than anyone anticipated- particularly relating to wind and batteries

- Large and small scale developments are viable with reducing levels of support

- Renewable technologies now compete favourably with traditional technologies and are no longer materially more expensive to develop

These market driven messages don’t sit comfortably with existing government policy and action. Investor support for onshore wind and solar has all but been removed despite rapidly falling development costs, whilst the equivalent CfD support guaranteed for Hinckley C nuclear build is propped up at £92.50/MWh assuming that it is built on time and to budget. An eye watering value when compared to the £57.50/MWh required to make offshore wind viable, and increasingly difficult to defend on any grounds.

So why the mismatch in policy and market forces? Underpinning these policy decisions is the fundamental requirement to ensure that there is a baseload of guaranteed future generation to meet the majority of demand at any time. Renewable generation, by its very nature, cannot be guaranteed if the wind doesn’t blow or the sun doesn’t shine. Therefore, the government, in its own mind, needs to secure a combination of safe nuclear and gas build in order to guarantee security in a relatively low carbon future. Recent changes to policy, or at least the regulation underpinning it, much to the annoyance of many investors and developers, effectively cauterised what was a burgeoning sector in small scale distribution connected generation. The argument for change was based on inefficient transmission cost recovery, but the motive behind it was to enable gas investment to come to the fore in the capacity market. This has not yet happened to the extent hoped.

What has been proven time and time again, is that government intervention inevitably has unintended market consequences, which consequently need to be addressed through further intervention. This results in an increasingly uncertain, unpredictable and uninvestable market.

So can the market be left to guarantee security of supply?

Fundamentally it feels like we’re at a crossroads. The pace of technological developments, particularly through batteries, increasingly points to a world where renewable generation is not as unreliable as has always been assumed. We may quickly be moving towards a world where the ability to manage demand more dynamically, coupled with the ability to store energy for when we need it, removes the need for the traditionally understood baseload technologies. However, it is a big leap of faith to bet the country’s future energy security on current unknowns.

With one of the biggest impacts of Brexit relating to Nuclear, would it be so radical to cancel Hinckley, redivert the ringfenced money to securing a minimum level of gas development and allow the remaining market to develop rationally? Perhaps, a pie in the sky suggestion, but it is these more radical thoughts that need to come to the fore now to allow the market, and more importantly the investment to support its development, to operate on a rational basis.

Government should not be picking winners and losers in a time of accelerating technological development and need to take the results of recent auctions as a clear message that the assumptions that have underpinned energy markets since privatisation are rapidly being ripped apart. Ultimately market innovation should be good news for a lower carbon future, UK industrial development and most importantly consumers.

Jo Butlin is CEO of EnergyBridge (UK) Limited, a business focused on helping investors and businesses navigate the changing UK energy market. See www.energybridge.co.uk for more information.

#investors #cfd #securityofsupply

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