Energy market reforms will see the Renewables Obligation (RO) disappear and be replaced by a new Contracts for Difference (CfD) scheme.
The Department of Energy and Climate Change (DECC) has published its new Energy Bill that contains a policy in which a feed-in tariff with CFD will be introduced. These will eventually replace the RO scheme and according to the Government will make investment in clean energy more attractive by removing long-term exposure to electricity price volatility.
The returns for generators will be stabilised using a fixed level mechanism known as a strike price. Electricity generators will receive revenue from selling their energy into the market as usual. If the market price drops below the strike price, they will also receive a top-up payment from suppliers for the additional amount. But if the market price is above the strike price, then the generator must pay back the difference.
DECC intends to consult on the first set of strike prices in 2013 and will announce the prices in the second half of that year within the 2013 to 2018 delivery plan.
In principle, the CfD will be standardised across technologies, but in the short-term there may be some variation in recognition of the different risk profiles of the technologies. The CfD will also be grandfathered.
The RO will be closed to new generation from April 2017, but the White Paper proposes a transition phase between April 2014 and March 2017 during which new renewable generating stations will be able to choose between support under the RO or under CfD.
Companies currently receiving the RO will continue to receive it up to 2037.
The Energy Bill also intends to introduce a capacity market, which will work in concert with the CfD programme. This will mean that payments will be made for guaranteed supply when wind energy supply is low for example.
Energy Secretary Ed Davey said: “Leaving the electricity market as it is, would not be in the national interest. If we don’t secure investment in our energy infrastructure, we could see the lights going out, consumers hit by spiralling energy prices and dangerous climate change.
“These reforms will ensure we can keep the lights on, bills down and the air clean.
“The reforms will also be better for the economy, leaving us less vulnerable to rising global energy prices and supporting as many as 250,000 jobs in the energy sector.
“By reforming the market, we can ensure security of supply for the long-term, reduce the volatility of energy bills by reducing our reliance on imported gas and oil, and meet our climate change goals by largely decarbonising the power sector during the 2030s.”