CfDs ‘indispensable’ for net zero

Energy UK has expressed concern about “negative rhetoric” towards the Contracts for Difference (CfD) scheme in a recent government paper.

Utility Week has seen the trade body’s response to a recently concluded call for evidence (CfE) from the Department for Business, Energy & Industrial Strategy (BEIS) on enabling a high renewable, net-zero electricity system, which lays the ground for reforms of the scheme for supporting renewable energy projects after its next round of auctions in 2022.

Energy UK says it recognises the “challenges” in relying on the CfD to underpin the energy system as it becomes increasingly dominated by intermittent renewables.

But the response expresses concern about the document’s tone on the CfD, which has been widely credited with enabling the UK’s offshore wind boom in recent years.

It says: “We are concerned by some of the negative rhetoric towards the CfD scheme in the CfE document and broader sector dialogue. We wish to reiterate the success of the CfD framework in delivering investment and bringing forward low-cost, low-carbon generation.”

The CfD scheme is “indispensable” for efforts to achieve the UK’s 2030 and 2050 emissions reduction targets, is the best available option for deploying bulk low-carbon power and should be maintained until a “clear superior” option emerges, the trade body insists.

The response points out that the CfD regime has delivered substantial cost reductions and stimulated innovation which has benefited UK consumers and the economy, whilst delivering “cost-effective” decarbonisation.

On this basis, the report supports maintaining the CfD framework to provide the “stable” investment climate that developers and the supply chain need and ensure continued momentum in the deployment of renewables.

Energy UK recommends that the government publishes a CfD procurement strategy out to 2030, including a timetable of auctions and the minimum average total GWh deployment consistent with a trajectory to net zero emissions.

Setting out the key factors and the process for calculating future auction volumes would further increase investor and supply chain confidence by making the timetable less vulnerable to short term policy decisions, the response argues.

In the absence of this more robust policy framework, Energy UK warns that investment could be lured away to other countries.

It says there are limitations to the two primary alternative routes to market for procuring bulk low carbon to CfDs: Corporate Power Purchase Agreements (CPPAs) and merchant deployment.

The merchant route will remain “very challenging for the foreseeable future” due to “highly volatile and uncertain” revenue streams, which deter institutional investors seeking reliable revenues.

In addition, increasing deployment of low-carbon generation with zero or very low marginal cost onto the system will significantly reduce merchant prices, meaning this market will remain “niche” and make a limited contribution to reaching net zero, the response says.

It adds that the market for CPPAs is “increasing but limited”.

Energy UK also says that it strongly opposes the idea, proposed in the Helm Review in 2017, that generators should have to account for flexibility and wider system impacts and provide balancing services to the system operator via CfD contracts.

It says that procuring bulk low-carbon power at low cost should remain the objective of the CfD and that flexibility should be procured at a system rather than an individual generator level.