CfDs for existing generators could reduce energy bills

Allowing existing renewable and nuclear generators to participate in Contracts for Difference (CfD) auctions could save households more than £300 per year on energy bills, UK Energy Research Centre (UKERC) has suggested.

A discussion paper published by UKERC said while the energy security strategy promised more nuclear and renewables, this will take time to build and therefore longer for the potential savings to be passed onto consumers.

Most existing large scale renewables are supported by the Renewables Obligation (RO) scheme which pays the gas-price-dominated wholesale electricity price plus at least £50/MWh.

Supporting older projects with the RO scheme, UKERC said, “made sense” when the average wholesale power price was typically £50 or £60/MWh. However, with average wholesale costs now reaching £200/MWh or more, the market is “significantly overpaying” many renewable generators.

As such, UKERC suggested that if existing renewable or nuclear generation were to be paid via a CfD in what it dubbed a “pot zero” auction, generators could provide power at much lower prices and in return receive long-term stable revenues.

It calculated that if 50% of eligible wind and solar were to take part in a pot zero auction and it cleared at £100/MWh, the annual savings would be around £5 billion or around £70 per household, representing a 7.2% reduction in wholesale costs. If all of Britain’s operating nuclear power stations were to participate, overall savings would be £22.4 billion per year – a reduction in wholesale costs of 33.2%. This would reduce household bills by an average of £316 per year.

UKERC said adapting the existing CfD scheme would not require any new legislation or changes to market rules.

Rob Gross, the paper’s lead author, said: “We know that gas sets the wholesale price, which is now four times higher than when RO projects were built and much higher than the cost of running nuclear power stations.

“We wanted to think of a way to unlock their lower costs without complex rule changes. The government runs CfD auctions every year for new renewable energy schemes, so why not run one for existing projects? Consumers would get lower prices and in return generators get long-term stable revenues.”

Meanwhile, renewable energy company Xlinks has confirmed it is in negotiations with the government to procure a CfD for its project to import solar and wind power from Morocco via an interconnector.

A spokesperson told Utility Week that Xlinks does not fall within any of the CfD pots identified for the competitive allocation rounds, and that there appears to be no comparable projects at a similar stage of development to compete against.

However, they added, the project “fits well” with the funding support provided by the CfD mechanism and as such the company believes a CfD would provide the best risk profile and value for consumers.

Xlinks said its project will be capable of supplying 8% of Britain’s electricity needs at £48/MWh for 25 years under the current CfD mechanism.

It is planning to build a total of 10.5GW of solar and wind farms in Morocco to reliably deliver 3.6GW of power to the UK for an average of more than 20 hours each day.

Xlinks chief executive Simon Morrish said: “We are not looking for government funding to assist with the cost of the project which presents an enormous opportunity, consistent with UK net zero commitments and with minimal risk.

“We are working with UK government to agree a CfD that would help bring down bills significantly.”