‘At the moment, when gas prices are high, we end up paying more for our electricity, even though the cost of producing it doesn’t change. And so myself and Ed Miliband are now working to come up with a practical way that we can delink those prices’. So said Chancellor Rachel Reeves. And a few days later, Energy Secretary Ed Miliband doubled down on net zero with a new plan to face up to fuel prices rises and energy uncertainty, saying that in ‘the era of clean energy, security must come of age’.
In his new plan, the older ‘legacy’ renewables with Renewable Obligation (RO) contracts will have to move to fixed price Contract for a Difference (CfD) arrangements, to escape paying the Energy Generation Levy (EGL), the already existing ‘windfall tax’ on excess power market profits, which will be increased from 45% to 55% at peak gas price times. The extra funds raised by this will be used to cut household power bills.
About 30% of renewable projects are still on the RO, which gave them an initial extra push in the power market, but now, arguably, they don’t need it. Though not all of them will like having to move and cope with less support. However, Aurora energy said ‘the proposed expansion of fixed-price CfDs, alongside incentives for legacy ROC-backed assets to participate, is a credible pathway to reducing gas price exposure over time. Careful design will be needed to avoid locking in temporary high prices but, if done well, there is an opportunity to provide a fair return to commercial generators whilst delivering modest consumer bill savings from lower financing costs’. So guarded support from them.
Although not everyone was quite so sure. Some thought it was marginal and that something more radical was needed to break the gas-power price link. For example Energy Voice quoted Adam Bell, of Stonehaven, who said the package of reforms was a ‘missed opportunity’. He said the efforts to drive generators into wholesale CfDs by increasing the EGL was not a strong enough incentive. The Guardian’s correspondent also said the new RO exit plan might take time and only have a small impact.
However, the energy industry seemed mostly happy, perhaps since it didn’t look like having much impact on renewable power suppliers. For example, Energy Voice also cited the view from Octopus Renewables Infrastructure Trust (ORIT) who said the EGL change should not have a material impact on its valuation, but noted that fixed price CfD ‘may provide an opportunity to secure additional long-term fixed revenues’. And it also quoted Adam Forsyth, from Longspur Research, who said the higher EGL rate would not have much impact on renewable generators, but thought that ‘the new voluntary contracts do provide a useful hedging opportunity and could be a de-risking factor for clean energy companies, although much will depend on actual pricing’.
A bit more positively, Greenpeace thought it was at least a start in the right direction. Not so the Tories and Reform who hated it, claiming that it would pile on ‘cost after cost onto people's electricity bills’ (Tory), and would ‘lock future governments into wasteful, expensive energy contracts’ (Reform). But the Greens liked it, as far as it went, though they complained that action should have been taken well before this and pointed to more radical ideas. Overall? Carbon Brief, seem to see it as a good try, if rather modest, based on the initial UKERC plan, and most of the reactions it mentioned were also positive- although few saw it cutting prices much
Beyond the EGL change, there were also some other aspects to Miliband’s new plan, designed to boost renewables, most of which seem sensible. There will be more use of public land for solar and wind, with Great British Energy working with the Ministry of Defence, Network Rail, Forestry England and others to build turbines and solar on railway & industrial sites and untapped public land. DESNZ says this could unlock up to 10GW of wind & solar. A bit more contentiously, regulations will be streamlined, for example allowing larger electricity substations to be built without a full planning application, to let homes and businesses connect to electricity more rapidly, while also supporting growing electricity demand from activities such as electric vehicle charging and data centre development.
Will it all work? No dates or specific details for cost reductions were offered, and, as already indicated, some thought that it was only likely to have marginal impact on prices, but, being more optimistic the new policy may help consolidate the current basic trend, with cheaper renewables replacing more costly gas, and some renewables not needing subsidies. So as Dr David Toke has pointed out, ‘there is a now a substantial decline in the amount of time that gas prices dictate the costs of wholesale electricity in the UK’. And, more specifically, Rachel Reeves was convinced that ‘alongside moving generators on to the competitive pricing assured through wholesale contracts for difference, increasing the EGL to 55% will help to break the link between high gas prices and high electricity prices – offering households and businesses stronger protection against future energy shocks.’
Not everyone sees it like that, but, it is possible that things may improve as the new policy starts to bite. Though no one can say exactly when! But after July, when the new CfD round is now scheduled, a lot of new lower-cost green capacity will hopefully get backed, and ex-RO projects presumably also will also be moving over to the new CfDs.
However, in parallel, Miliband is still pushing new nuclear very hard, SMRs especially, despite the big uncertainties about costs and delivery, and he also seems to see a need keep access to more gas going – a ‘belt and braces’ approach which, arguably, may slow the transition. Or make it more palatable to Reform? But unless you believe, as they apparently do, that we should go back to gas, maybe it all boils down to how fast you think the transition to green energy should and can go. The economics look clear. A recent analysis by the Renewable Energy Association claimed that UK renewables would soon become the most economically favourable source of power, even after accounting for the full costs of expanding grids, storage and transmission. Why delay?
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