Emphasis on affordability driving policy direction on CfD auction delay and Fixed Price Certificates consultation – LCP Delta
Energy transition Power markets
There have been two significant announcements from DESNZ this week on renewable support schemes. First, there will be a delay to the next CfD auction. Second, the publication of the Fixed Price Certificates to replace the existing Renewable Obligation Scheme.
On the CfD delay, Sam Hollister, Head of UK Market Strategy, LCP Delta, commented:
“Yesterday's announcement of a pause before AR9 raises some fairly fundamental questions about what comes next - and certainly raises the stakes for getting AR8 bidding right.
“This is consistent with the Government’s renewed focus on affordability, which we have also seen in the Budget’s confirmation on the procurement approach for AR8 and in the Wholesale CfD consultation last week. The question is now not just how much renewable capacity we can procure, but how it reduces bills.
“For developers, the immediate implication is that AR8 may be the last opportunity to secure a CfD for some time, with the next auction potentially looking quite different. That changes the opportunity cost of not winning, although it does not make bidding below a financeable level any more sensible.
“In our recent AR8 analysis we factored in that there would be a move from a cost neutrality approach for auction clearing to a cost minimisation approach for consumer bills this year. That distinction looks increasingly important for understanding both the auction budget and the opportunities for bidders.”
On the Fixed Price Certificates consultation, Bertalan Gyenes, Senior Consultant , LCP Delta, said:
“The consultation highlights that DESNZ is looking to move to a scheme without a trading element, with a single, inflation-linked price per certificate, primarily based on the ROC (Renewable Obligation Certificate) buy-out price. While changes won't kick in until 2028 at the earliest, DESNZ clearly intends to move ahead with the reform as they see ROC price volatility as a real issue as liquidity falls with more and more Renewable Obligation (RO) agreements coming to an end.
“Existing generators typically receive an uplift to the RO price as part of their revenues, as many suppliers and PPA offtakers pass through recycling revenues. While the actual amount they receive depends on their commercial arrangements, this can be as much as 10% of the ROC buy-out price as an additional source of value.
“Government proposes an uplift to reflect this, but has not committed to matching existing recycling revenues, and has not published a firm-minded position either. In line with the recent increase in emphasis on affordability in the power system, the consultation highlights potential scheme savings from setting a relatively low uplift. Setting it too low would mean that some generators will achieve revenues that are lower than what they had expected, reducing income that can be used to build the next generation of assets.
“Listed renewable funds took a hit last year when the government decided to change the indexation measure for RO and FiT generation, which may have lifted capital costs for projects aiming to enter this year's AR8 auction. So, the same question needs asking here: what are the overall implications for bills, rather than just the immediate savings?”
