How To Support Renewables, Meet Net Zero And Minimise Costs: Call For Evidence

• Published date: 17 February 2021
• Subject Matter: Energy and Natural Resources, Energy Law, Oil, Gas & Electricity, Renewables
• Law Firm: Addleshaw Goddard LLP
• Author: Mr Richard Goodfellow and Paul Dight

On the same day as the Energy White Paper, the Department for Business, Energy and Industrial Strategy (BEIS) published a Call for Evidence titled Enabling a High Renewable, Net Zero Electricity System. It got somewhat lost in the noise of the White Paper and then the end of the Brexit implementation period but it is open until 22 February so there is still plenty of time to respond.

SUMMARY

There's lots of food for thought in this Call for Evidence and it could eventually lead to a fundamental redesign of the Contract for Difference (CfD), which is the main scheme for supporting renewable energy projects. It won't affect the upcoming fourth Allocation Round due later this year (for more information on this see our article) but it is likely to mean changes to the CfD after that.

The Call for Evidence asks for evidence on how BEIS' policies can achieve three objectives:

• Maintaining growth in renewable deployment to meet net zero targets - BEIS are looking to understand more about how projects will derive revenue and the security of that revenue, what the impacts of increasing amounts of low marginal cost generation will be and how these will change over time;
• Ensuring overall system costs are minimised for electricity consumers - exploring how to minimise the whole system costs of renewable deployment particularly looking at the balance between price stability and exposure to demand signals, as well as locational signals and the role of renewables in providing system services; and
• Supporting and adapting to innovative technologies and business models - to learn more about the new types of project coming forward, such as those utilising multiple technologies, extensions of old projects or international projects that work across national borders.

BRIEF CONTEXT

The CfD is now the main scheme for supporting renewable energy projects in GB. It works by guaranteeing a set price for the electricity that a renewable power plant produces. Generators bid their proposed prices in a CfD auction and contracts are awarded based on the lowest prices bid (it's more complicated than that, but that's the basic premise). The CfD is a contract to pay the "difference" between the market reference price (which is based on wholesale prices, so effectively the price the generator would get from selling their electricity on the market) and the (higher) bid price ("strike price"). So generators end up being paid a guaranteed strike price no matter what the wholesale price does, although worth noting that if the market reference price goes above the strike price the generator pays back the difference, and if the market reference price goes negative (i.e. there is so much electricity on the system that consumers get paid to use it) then generators don't get paid anything.

The CfD scheme has been very successful since it was first introduced in 2015, especially for offshore wind...