Contracts for Difference: the Gift that Keeps on Giving

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.