Wednesday, 17 July 2013

DECC to give Big Six 'license to skim' off renewable independents

In an attempt to defuse the problem that independent renewable generators will not be able to obtain 'contracts for difference' (CfD) under arrangements set out in electricity market reform, the Government is proposing a compromise that will favour the Big Six.

Under the so-called 'Backstop PPA' proposal as mooted in House of Lords amendments by Lord Teverson to the Energy Bill, electricity suppliers will be required to offer power purchase agreements (PPAs) to independent developers, and things will be made easier for small electricity suppliers. See
However, the price of this compromise is that inevitably the Big Six will give PPAs to the independents that are worth rather less than the value of the CfDs  are to the Big Six. In effect, the Big Six will be able to extract an economic rent for themselves of 10 per cent or more.

This system will mean that the Renewable Energy programme will work with less cost-effectiveness for the consumer and will deliver fewer renewable energy projects than if a system was used that allowed independent developers to earn more-or-less the same amount of money from renewable energy projects as the Big Six. This would happen under a 'fixed' Feed-in Tariff system (see the report which I wrote for Friends of the Earth), or also the GPAM proposal. The GPAM proposal, still supported by some Lords in their amendments would work in the context of the CfD system and would be a more efficient system of making the renewables programme work under a 'CfD' system. See
However big electricity suppliers may not like this (GPAM) system since they have very little opportunity to extract premiums from the PPAs which would have to bought and sold on a competitive 'auction' basis. This is just like the Government used to sell old 1990s renewable energy contracts to its own Renewables Obligation to raise money for the Treasury (via the Non-Fossil Purchasing Agency) rather than give money away to the electricity suppliers.  But now the Government appears to have caved in to the demands of the electricity majors and given them a system that they want rather than one which would allow independent generators to build more projects for the same cost to the consumer.

In many ways this is something of a return to the inefficiencies of the Renewables Obligation, wherein in order to obtain a long term power purchase agreement, independent developers have to give away part of the value of the renewable obligation certificates (ROCs) to the electricity suppliers.

In fact independent developers are becoming increasingly important and in the future are tipped to develop the bulk of renewable energy. This is because the major electricity companies are very short of money to invest in equity, and so will leave it to others to invest in new projects as much as possible. With the 'Backstop PPA' the electricity majors can earn lots of money out of the renewables programme without having to invest anything!

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