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Shifting existing nuclear and renewable generators onto Contracts for Difference (CfDs) will limit the government’s options for its Review of Electricity Market Arrangements (REMA), an industry expert has stated.
Prime minister Liz Truss announced the move earlier this month as part of the government’s response to the cost of living crisis.
During her statement to Parliament, Truss said that shifting this type of generation to CfDs will “end the situation where electricity prices are set by the marginal price of gas”.
“This will mean generators are receiving a fair price, reflecting their cost of production, further bringing down the cost of this intervention,” she added.
The REMA consultation was released in July this year and outlined plans to explore different “variants” of the CfD model with increased price exposure, either during the length of the contract or based on shorter contracts.
It will also explore decoupling payment from output, either through a deemed generation CfD or a revenue cap and floor.
Speaking to Utility Week, Alon Carmel, energy transition expert at PA Consulting, said: “The short-term intervention they are putting in place certainly limits their options for the REMA long-term wholesale market design. They might say the very immediate problem has been addressed, and take the foot off the accelerator on REMA.
“It’s really good that the government has decisively intervened in the energy market because it was a very dangerous situation and there were very serious economic consequences for a very large number of families and households.
“So it’s great that they’ve taken the bull by the horns, but there’s just such a lot of complexities that throws up about how to implement and deliver reforms including interactions with other policies and how the market works.”
Explaining his position further, Carmel said that what the government has committed to so far does not necessarily “bind their hands” very much in terms of longer-term design of the wholesale market.
“But,” he added, “the sort of things that have been floated such as saying all renewables obligation generators and nuclear generators should be put on CfD contracts to limit the price that they can get as an alternative to a windfall tax that, by its nature, would have an impact on the options for REMA.
“Continuing with CfD contracts is one of the options in REMA but there are a number of other ways in REMA for incentivising investment in low carbon. So, if you put everybody on CfD contracts, they last for about 15 years, then you’ve already taken one of the decisions that limits your options for a number of other REMA areas.”
Carmel said there will be a lot of devil in the detail in how to implement the proposals for expanding CfDs, including whether the scheme is voluntary and how to deal with the fact generators will have sold their power forward meaning they may be locked into contracts for several years.
“Maybe it’s not the end of the world if these new CfD contracts get phased in gradually over two or three years – you can dovetail with the existing forward contracts. But that does limit the impact, because the high prices and the crisis is now,” he added.
The theme of balancing security of supply, decarbonisation and affordability sits at the heart of the agenda of the Utility Week Forum, which will take place in London on 8-9 November. Find out more here.
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