Contracts for Difference: I ask the questions…

In DECC questions last week, I asked the Minister for Energy who was going to be the counterparty to the proposed  successors to the Renewables Obligation, the ‘contracts for difference’. These will be long-term contracts based on the ‘strike price’ for energy decided upon by the Government at the time the contract is given out, and will confer advantage (hence ‘difference’) on the generator contracting to supply low carbon energy. With me so far?  Well the minister wasn’t because he referred me to the ‘technical update’ on the market reform proposals, published last December, which says nothing about WHO will be the counterparty, and merely says  ‘payments will flow from counterparty (or counterparties) to generators’…… and that ‘the system will limit exposure to default’. So we know that being clear about who the counterparty is – who will guarantee it, take it onto their books as it were, is important, since the system does indeed need to ‘limit exposure to default’ for the contracts to be signed up to come early 2015.   The document that might tell us who will be the counterparty to CfDs will according to DECC be an update on the technical detail of the CfD design which is due to surface ‘early in 2012’, and hasn’t yet appeared. Still just about ‘early’ in 2012, I guess.

One of the reasons it may not have appeared yet could be, of course that there is not right now actually an answer to the question I asked last week.  Indeed, it appears that the scene around DECC currently resembles the bit from the film ‘The Three Amigos ‘ where the German airmen arrive in the Mexican bar – much diving of frightened parties under tables, behind counters etc.

Current divees include:

  • HM Treasury: they do not want to act as counterparties because of the effect of placing guarantees and potential liabilities on the public expenditure balance sheet, not least because of the state aid implications of doing so.
  • National Grid: they said they would act as the body that negotiates and gives out the contracts. But  they clearly don’t see that they, as a private company should hold the risk on  their balance sheets, as they emphatically told the Energy Select committee recently (see Q87):
  • The Big Six energy companies: their balance sheets between them look worrying enough without a further whole raft of possible liabilities to add – they are determinedly ‘out’.

That leaves – well, who does it leave? Not really anyone, to be precise.  DECC are, apparently telling private enquirers that it will probably be all right because some form of ‘counterparty guarantee’ will be hatched involving consumers.  That doesn’t sound exactly robust, or as the Technical Update document requires ‘a strong basis for investment.’

Still, they’ve got until ‘early’ summer to sort out who, if anyone, comes out from behind the overturned table with their hands up. I would put a little money, perhaps, on an extension of the Renewable Obligation Certificate Regime (perhaps to 2020) to allow it all to be sorted out. Meanwhile, I’ll keep on asking the questions…

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One thought on “Contracts for Difference: I ask the questions…

  1. Pingback: Another geeky piece on Contracts for Difference (but actually quite important) | alan's energy blog

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