UK low carbon generator revenue cap design 'catastrophic for renewables'

The UK's proposed Cost-Plus Revenue Limit on low carbon generation must be reconsidered to avoid "catastrophic consequences" for investment in renewables, sector association Energy UK said Oct. 23.

On Oct. 12 Security of State for Business Jacob Rees-Mogg introduced the Energy Prices Bill to parliament. The bill includes government powers to limit the revenues of wind, solar, nuclear and biomass generators, among other low carbon sources.

"Given the change in leadership of the Conservative Party and a new Prime Minister, it is our view that the Bill must now be reconsidered and solely focused on ensuring that crucial support can be delivered for consumers, businesses, and other non-domestic consumers this winter," Energy UK said.

The association decried the prioritizing of oil and gas extraction over clean low carbon energy by the government.

"The Oil and Gas Windfall tax will enable a fossil fuel bonanza by diverting up to GBP25 billion away from tax and into new UK oil and gas extraction annually," it said.

The Oil and Gas Windfall Tax (Energy Profits Levy) grants fossil fuel extraction an investment allowance of up to 80% and runs until the end of 2025.

Similar tax treatment for low carbon generation would bring forward an extra 9 GW/year of offshore wind capacity, it said.

However, "no such investment allowance exists in the CPRL, and the Government will be empowered to keep it in place until the end of 2027," the association said.

At reported levels of GBP50-60/MWh, the CPRL would cap revenues at levels significantly below investor expectations of wholesale price evolution at the time of their investment, it said.

Reasonable pre-crisis wholesale price expectations had an upper range of GBP160/MWh, it said.

Platts assessed UK offshore wind capture prices at GBP92.44/MWh Oct. 20. The assessment has averaged GBP208.73/MWh in the year to date, S&P Global Commodity Insights data showed.

Biomass concerns

Low carbon fueled generators (biomass, biofuels) in scope were uncertain, meanwhile, about how increases in fuel costs would be accounted for under the cap.

"Generators have already suspended purchases of extra fuel to support security of supply over the coming winter as a result of this uncertainty and, if the UK becomes an unattractive place to import fuels due to the CPRL, the UK may struggle to source the fuel required to support security of supply this winter and beyond," the association said.

Biomass-fired generation accounted for 6.42% of UK supply in the 12 months to Oct. 24, according to Drax Insights.

"The low-carbon industry continues to believe that a medium-term solution through a voluntary Contracts for Difference would be the most attractive option, both bringing down bills and crucially at a time of market disruption, maintaining investor confidence," Energy UK said.

Any UK revenue cap must at a minimum be aligned with the equivalent EU cap of Eur180/MWh (GBP157/MWh), it said.

Concerns recognized

Several of Energy UK's concerns were recognized by the government's proposals on Oct. 12.

Of relevance to the limit would be pre-crisis expectations for wholesale prices, and what a reasonable "upper estimate" for those might be, the Department for Business, Energy and Industrial Strategy said.

The government was also mindful of the need for an efficient price signal in the wholesale market at times of need.

"As a result, we are considering an arrangement that allows generators to keep a proportion of their revenue above the limit," it said.

Further, it recognized the importance of dispatchable and baseload generation for security of supply.

"The low-carbon technologies that can deliver these types of power do tend to have higher input costs (such as biomass and nuclear) and this is being considered as part of the detailed policy design," it said.

The bill legislates for powers allowing the government to consider running a voluntary Contracts for Difference process for existing generators to take place in 2023.

"A voluntary contract would grant generators longer-term revenue certainty and safeguard consumers from further price rises," it said.

The government wanted the revenue cap limit to come into force from the start of 2023.