Electricity Market Reform update: investment in renewables
Statement by Edward Davey on publishing the Contract for Difference (CfD) strike prices for renewable technologies.
I wish to inform the House that today the Government is publishing the Contract for Difference (CfD) strike prices for renewable technologies, alongside an update to the key CfD contract terms. This information is being published ahead of schedule in order to provide further certainty to industry and investors.
Contracts for Difference are one of the main mechanisms created as part of the Electricity Market Reform (EMR) programme. EMR is the central component of the Energy Bill, currently being considered by Parliament, which will address the need to attract unprecedented levels of investment in the UK electricity sector over the coming decades to replace our ageing energy infrastructure with a diverse, low-carbon energy mix.
CfDs will stimulate investment in all forms of low-carbon electricity generation by providing efficient, long-term support. The CfD reduces the risks faced by low-carbon generators, by paying a variable top-up between the market price and a fixed price level, known as the ‘strike price’. As well as reducing the exposure to volatile and rising fossil fuel prices, the CfD protects consumers by ensuring that generators pay back when the price of electricity goes above the strike price.
The strike prices and updated contract terms being published today have been set to meet the Government’s objectives on renewable energy, decarbonisation, security of supply and minimising cost to consumers, and are informed by the feedback and evidence received through the Delivery Plan consultation, conducted during the summer of 2013. The consultation included draft strike prices for renewable technologies, and was followed in August by the publication of further detail on CfD contract terms.
The strike prices published today provide:
- A basis for renewable electricity to achieve at least 30 per cent of generation by 2020, in line with the EU renewables target;
- A strong foundation for offshore wind. DECC modelling suggests that 10GW is achievable (in line with the 8-16GW range in the draft Delivery Plan). This is not a target and actual deployment will depend on technology costs;
- Good value for money for consumers by ensuring that the overall level of support remains within the LCF and that where cost savings can be made they are reflected in revised strike prices; and
- Continued ambitions for other technologies that are expected to be in line with the draft Delivery Plan and the Renewables Roadmap
The pipeline of projects under development in the UK in established technologies is strong enough to permit earlier introduction of competition. The European Commission is expected to publish new Environmental and Energy Aid guidelines for consultation soon.
Given the approach set out in the recent DG Energy guidance, it is expected that the new state aid guidelines will require the UK to move to competition for more established technologies. The Government will confirm its approach and details of how this will operate through the Delivery Plan and engagement with stakeholders early in 2014.
The CfD contract terms have also been updated to take into account feedback received from a wide range of stakeholders following publication of detail on the terms, along with a draft CfD contract, in August 2013. The Government has now made a number of changes to further support the ability of developers to bring forward investment at lower cost to consumers. In particular the updated terms provide flexibility to reduce capacity, protection against unexpected events and protection against changing circumstances.
The Government’s full response to the consultation on the draft Delivery Plan, is intended be published later this month alongside the EMR Delivery Plan. The Delivery Plan will include further detail on the strike prices. The documents will also be accompanied by a detailed explanation of the Government’s final policy positions on the CfD contract terms.
Government also announced today that sixteen projects have reached the next stage of Final Investment Decision Enabling for Renewables process to secure an early form of Contracts for Difference. The final selection of projects will take place in spring 2014.
The documents, Investing in renewable technologies – CfD contract terms and strike prices and Final Investment Decision for Renewables: Update 3: Contract Award Process, are available on the Government website.