Against the background of one of Europe’s most liberalised energy markets and a renewable generation subsidy scheme designed to be driven by market forces, there are signs that the Government is struggling to make the model fit with its challenging low carbon targets. Is Whitehall losing faith in the power of free markets to deliver the goods when it comes to climate change?
The Government’s fix looks like taking the form of a contract for difference (CfD) mechanism bolted onto the existing market structure. Its current consultation on the Renewables Obligation (RO) includes a proposal that generators should be relieved of wholesale power price risk (and possibly also Renewables Obligation Certificate (ROC) price risk) through a long term CfD which swaps exposure to price volatility for a fixed reference price. The aim is twofold: to boost investor comfort while guaranteeing a reasonable return on the one hand and to reduce the risk of over-compensation, so minimising the cost of the RO to consumers, on the other. A long-term contracted approach also mitigates the current regulatory uncertainty arising from the Government’s refusal to commit to ‘grandfather’ existing incentives.
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