Another geeky piece on Contracts for Difference (but actually quite important)

I posted a piece here a while ago about the serious problem of who will be the ‘counterparty’ to the ‘Contracts for Difference’ likely to be given out to lower carbon generators under the new Electricity Market Reform arrangements. That is more than quite important, since no-one is going to be able to get the whole system going unless someone is around to underpin and guarantee the contracts.

I said in that piece that I’d ‘keep on asking the questions’  and I have. Just last week in fact, I received an interesting answer to precisely that question boiled down into an acceptable form of words so that the  Table Office would accept a written question.  I asked about what I understand is  likely to be the model for a ’counterparty’ agreement that does not involve Treasury or the big energy companies as the ’guarantor’ –  some kind of counterparty fund which will, presumably act like an energy version of  the Association of Travel Agents holiday bond to rescue stranded tourists from Albania when ‘AlbanianTours4U’ goes belly up.

Well, yes, the answer agreed, we (DECC that is) ‘have considered a number of mechanisms through which to settle the payments due under the  Contract for Difference, including the use of levies, obligations and the industry codes, and the implications for classification‘. They are they say, going to ‘set out more detail on the proposed model in a draft operational framework this spring’ (?) I know, its been raining a lot, and it doesn’t SEEM much like spring, so there will be some leeway there. But it is comforting to know that, although Government is not bearing the risk on its balance sheets, a model that may resolve the problem is on its way.

Which then turns us back to the Contracts for Difference that have caused the problem in the first place.  Casting my mind back… didn’t it emerge victorious from a mini-competition the Government set up before the White Paper to consider whether  a Premium FIT (i.e. A fixed underwriting) or contract for difference (variable remuneration around a fixed ‘strike price’) would win the day for the preferred model for low carbon support?

You’d be right if that is what you thought, and it won for a very good reason. Although there were some strong voices advocating a premium FIT as the preferred method of low-carbon price support,  the clincher was that, as the Government said,  a Contract for Difference , unlike a premium FIT ‘insulates generators and consumers from both short term volatility and the impacts of long term price trends’.  That appears in para 100 of the impact assessment that accompanied the Electricity Market White Paper.  Now I wonder if you can guess why it is that this should be so? The answer is at the end of the same paragraph. It is because ‘the price risk is borne by Central Government Balance sheets.

Except that now it won’t be. So let’s review where we’ve got to.

  • The Government chooses CfD despite other disadvantages because the generators and consumers won’t  experience any volatility in price because the Government  will absorb the price risk on its balance sheets (i.e. act as a counterparty)
  • It turns out that the government won’t act a counterparty (the man from Treasury says ‘no’) This invalidates the argument for choosing CfDs.
  • Instead of revisiting the basis for your original decision in the light of this, you try to design a new contraption (which will, incidentally probably count as yet another ‘levy’) to solve your problem.

Not so smart, eh?  Especially since, as has been pointed out to me, the continuing  Renewables Obligation  for those choosing it before 2017 will after 2027 essentially becomes a fixed price premium FIT… I feel some more questions coming on.

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3 thoughts on “Another geeky piece on Contracts for Difference (but actually quite important)

  1. Have you read Jonathon Porrit’s piece on the cost of nuclear power and the likely subsidy payments accruing to EDF under the FiT-CfD? http://www.guardian.co.uk/environment/blog/2012/may/04/expense-nuclear-power-energy-coalition?

    It’s time for serious questions need to be raised in Parliament about why British consumers should pay a £60 billion subsidy to state-owned EDF for a 60-year old technology that is getting ever more expensive. What happened to ‘no subsidy for nuclear’?

  2. Extract from page 17 of the Coalition Agreement : “Conservatives are committed to allowing the replacement of existing nuclear power stations provided…that they receive no public subsidy.”

    Oh what a wicked web we weave,
    When first we practice to deceive.

  3. Pingback: Queen’s Speech: An On-Time Turkey? | alan's energy blog

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