The exasperation and frustration from the renewables market is tangible today as OFGEM confirms its decision on the revised treatment of the socialisation of certain industry costs. In short, end users will benefit as a result of the change, small generators will lose out and critically new investment will lose bankable revenues.
There are two things at play here. The ‘right’ economic argument to create an apparently level playing field (OFGEM’s position) and the reality of investor sentiment in building new renewable generation (the market’s position). Sadly, the timing and the impact of the whole change process is a bit like shooting an own goal in the carbon reduction game.
Whilst in a theoretical, modelled world OFGEM may be right, there is some distortion in cost allocation- the impact of the distortion has been one of the key drivers in transforming our energy landscape over the last 10 years. So called ‘embedded benefits’ (which in simple terms are revenue streams received by distribution connected generators for ‘not using the network') proved an essential and bankable revenue stream which reduced investor's risk and helped to support many decisions to go ahead with projects.
Time and time again, this market ignores the importance of people and sentiment. Too often the market is designed for the market on a purist and theoretical basis without real consideration of the impact of policy decisions on market behaviour and macro impact.
With the closure of ROC and FIT schemes of subsidisation, the unfortunate consequences of the suspension of the capacity market and now the nail in the coffin on embedded benefits- pretty much all bankable revenues have been eliminated. Which means that risk based investment in almost all technologies other than offshore wind (supported by CfDs) has fallen off a cliff.
It feels a bonkers decision when so much urgency is needed on delivering a net zero world.
Where do we go from here? With the paralysis of parliament, there is unlikely to be any golden egg soon to get investment going again. So until further notice we’re largely reliant on offshore wind to deliver our future generation needs. I don’t believe that this outcome was ever designed to be part of a grand plan (and there should be a grand plan) . As a consumer, my vote would be for a few extra pennies on my bill, in return for a carbon free world.