Contracts for Difference: the Gift that Keeps on Giving

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You’ll understand this a bit later…

The news that the Treasury are aiming to reduce the ROCs rewards for onshore wind by 25% is a potentially life threatening attack on the shorter term deployment of onshore wind (which is its intention).  But should come as no surprise to those who have been following the increasingly nasty efforts by Treasury to intervene in the financing of renewables generally. Put bluntly, Treasury doesn’t like all this subsidy flimflam for renewables and doesn’t see why the market can’t sort it all out: er…that’s it.

All of which makes its stance on Contracts for Difference increasingly difficult to fathom. At the same time as George Osborne is throwing banana skins in the way of renewable deployment, he is, apparently sitting back and doing nothing about the longer term (and potentially huge) costs of the CfD rollout.

It may be that DECC have yet to sit down and fully explain to Treasury the consequences of CfDs as they stand. On the surface, they look as though they stand in line with what Treasury would like to happen to renewables – they will get a modest uplift, but with no obligation on anyone to purchase renewable electricity after 2017, new entrants will find it difficult to survive unless they can get a Power Purchase Agreement (PPA) from someone. Who might that be? Almost certainly one of the Big Six, and who will hardly be likely to generously give out advantageous PPAs to people who want to sell power to them in competition with their own vertically integrated supplies. So independent producers will struggle to survive, and the market will do the rest.

But what, then about the other players in the brave new world of Contracts for Difference, new nuclear plants? No such worries there.  Not only will they get a special pre-contract contract enshrined in the new legislation, but they will, it seems get a far longer period for their CfDs than is currently envisaged for new wind. I had my worries about this and I am obliged to Tim Probert who pointed me in the direction of calculations made by Prof Steve Thomas on nuclear CfD.  He makes some reasonable assumptions about strike price and nuclear CfD longevity.  The result: £155 billion over thirty years for about three conventional power stations-worth of electricity, assuming Hinkley C and Sizewell C get built. Rather a lot of subsidy, huh?  And worse from a Treasury point of view is that CfDs, unlike the RO cannot be reduced by changing headway and buyout prices. Once you’ve got one, you’ve got one. Tim suggests it would be cheaper to give everyone a range of free A-rated household equipment; you might equally have a look at the likely cost the Renewables Obligation might have incurred over the same period if maintained. The RO is going to be just over £3 billion per annum by 2015.  Let’s say that it ‘peaks’ at about £5 billion per year a little after and then starts degressing.  That equates to probably £100 billion over the same period for perhaps 30 gigawatts installed, working at about 35% efficiency.  Far more power for far less money.

Exceptionally bad news for Treasury, I would have thought, who could save most of this endless subsidy by sticking with the RO, degression headway and all. But then maybe they have been reading the notes to the draft energy bill, instead of looking at the figures. The latest in a long line of zany charts makes its appearance therein.  It is figure I on page 19 of the Draft Bill for those with a mind to look.  It is headed ‘The four stages of EMR.’ By Stage three, in the ‘2020’s’ apparently, ‘all technologies have matured and move to technology-neutral auctions’  Maybe this is where Treasury have got confused.  Surely, one might reasonably suggest nuclear technology already IS mature, so won’t ‘have matured’ by the 2020s. There is, and will be no cost reduction unlike renewables as they come to market. So renewables face a CfD  of fifteen years, (assuming operators last that long – see above) as the draft operational framework for CfDs makes clear, after which they are mature enough to move to technology neutral auctions, whereas the already mature nuclear industry gets free money, apparently almost forever. Not very moneySupermarket is it?  Maybe when Treasury catches on to the forthcoming sherbet fountain of nuclear CfDs they will take some action. But then again maybe they won’t because alongside gas, they like nuclear rather a lot.

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7 thoughts on “Contracts for Difference: the Gift that Keeps on Giving

  1. There’s more about FiT CfD and its potential problems in “A subsidy for nuclear power and its unintended consequences” (http://bit.ly/KkvdVx).

    Gerry Wolff

  2. Very interesting piece. These plans are quite worrying for those of us who wish to see a thriving renewable energy sector beyond 2017

  3. It is clear that in an ideal world we should be gathering the social costs of polluting forms of energy from the companies who use them to create enegry. However, this clearly will not be the case. Use of Fossil fuels will continue to pollute the atmosphere and cause climate change. Nuclear will continue to produce waste which has to be managed for thousands of years. Decommissioning costs and the waste from the existing fleet of nuclear power stations will cost us, the taxpayer, £100 BILLION to clear up (see the Nuclear Decommissioning Authority budget for more details). The route to a cheaper energy infrastructure, based upon long term sustainability, is to end these highly polluting sources of power and concentratre on renewables. If that means subsidy to correct the market distortions that favour nuclear and fossil fuels, then so be it. Wake up HM Treasury!

  4. Mr atherton doesn’t say in his note how long the payments will be made for. Is the 30 years an assumption by Prof Thomas? The draft CFD framework only says of nuclear CFDs that they’ll be more than 15 years.
    Also, I note Mr Atherton says of the £166/MWh figure “But certainly a strike price anywhere near £166/MWh would, in our view, be almost inconceivable”, a point you and Prof Thomas forget to mention.
    And finally, do you and Prof Thomas believe that electricity prices will remain at their current level for the next 40 years? A rather large portion of the subsidy you assume EDF will receive is based on electricity prices not rising above £51/MWh. Are you saying that your view is that electricity prices will not rise in the future?

  5. Dr Alan Whitehead

    Congratulations for being selected for “UK Politician of the Year” in the Renewable Energy Awards

    Ann MacGillivray 🙂

  6. Pingback: The EDF Strike Price: You heard it here first | alan's energy blog

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