With a fifth of Britain’s ageing electricity plants closing over the next ten years, and commitments to getting 30% of our electricity needs from renewables by 2020 and to cutting greenhouse gas emissions by 80% by 2050 – investing in new low carbon electricity generation is essential. The really interesting issue is: how do we get this built and generating as cheaply as possible?
The Energy Bill that’s going through Parliament at the moment has the answer. Contracts for Difference (CfDs) offer a set electricity price to generators – known as the ‘strike price’. For every unit of electricity sold, the generator receives the market price for electricity, plus a ‘top-up’ payment, bringing the price they receive for electricity production up to the strike price.
CfDs offer the cheapest way of delivering new investment. Put simply, the certainty of income offered by CfDs reduces borrowing costs for investors. This reduction in borrowing costs alone is worth £5bn of savings to society. Furthermore, as CfDs reduce the riskiness of investing in renewables, we expect new investors to enter the market.
As investors face lower costs, the support required to bring on investment in renewables can be reduced too.
This is more cost effective than the existing Renewables Obligation (RO) which gives a market premium to renewables, but not a guaranteed price. And risk and uncertainty drives up the price of capital.
It’s difficult to compare CfDs with the RO because the way they work and their durations are so different. But, to illustrate the expected savings from the introduction of CfDs, this table shows the support costs per unit of electricity (MWh) needed to encourage investment in some example technologies, under the existing RO and new CfDs.
|2012 (£/MWh)||Under the RO||Under CfDs||CfD Saving|
So CfDs offer the best deal for British households. They’ve been designed to bring on the amount of new green power we need, while avoiding excessive returns to investors.
In addition, we can set strike prices lower over time as technologies mature and generation costs fall, they protect consumers against any large fuel price spikes (as a greater amount of our energy will come from renewables) and, if wholesale electricity prices were to rise above the ‘strike price’, generators will pay back to consumers.
Our analysis shows that CfDs will save the average household consumer £62 or 9% annually on their electricity bills, over the period 2016 to 2030, than would be the case under RO. Similarly, businesses can be expected to save around 10 to 11%.
CfDs will also continue the development of a green electricity sector, supporting jobs to spur growth in the wider UK economy. This investment will help prevent climate change and ensure that the lights remain on in the future.