Blog: CfD auctions are good news for business

20th May 2014

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John Midgley

EEF's Richard Warren on Decc's confirmation that low-carbon energy technologies will have to compete to win electricity supply contracts and why its good for companies

The government response to January’s consultation on the allocation of Contracts for Difference (CfDs) arrived last week with little attention from either the main stream or environmental press.

Perhaps unsurprisingly the bulk of attention was given over to the announcement of a new consultation on proposals that will likely see the Renewables Obligation scheme closed to solar photovoltaic (PV) projects larger than 5MW next year, which has sent the renewables lobby in paroxysms of despair.

The reaction to the solar announcement comes as no surprise, it could potentially spell a massive blow to the rollout of large-scale solar PV projects; such projects would have to compete to prove their cost effectiveness against other forms of low-carbon technology and at present it simply isn't able to do so.

What does surprise me, however, is that the announcement of competitive auctions received very little attention. There’s a possibility that this is because it was seen an almost forgone conclusion, but in itself it is a significant move that could have profound implications.

In a nutshell, Decc has moved from a position in which it intended to allocate upwards of 50% of the CfD budget with no form of competition or price discovery to one where all established technologies (including onshore wind and solar PV with a capacity of more than 5MW) will have compete against one another in auctions.

This has largely come about owing to new EU state aid rules on support for renewables. EEF is wholly supportive of the change and has been calling for technology neutral auctions for some time. The move has been achieved with such simplicity and with little opposition, the crucial question is: Why wasn’t it considered before?

Competitive auctions have been shown to be highly successful in driving down the cost of renewables elsewhere, in Brazil for example, but despite calls from UK industry for their early introduction, Decc showed precious little interest in such an approach until forced to do so by the European commission.

You may ask why this matters, if the end result is the same and we’ve ended up with competitive auctions anyway? Well it matters because it demonstrates a worrying lack of concern from the energy department about the affordability element of the so-called “energy trilema” – affordability + security of supply + decarbonisation.

The government’s order of priorities is clearly decarbonisation, followed by a poorly defined “security of supply”, which seems to be aiming for the greatest mix of technologies. Meanwhile, affordability gets little or no look in.

Introducing competitive CfD auctions has been largely uncontroversial and it could save consumers significant sums of money. However, Decc seems to prefer an almost “gosplan” approach in which it chooses the technologies and the prices rather than allowing the market to do so.

There still remains a group of “less established” technologies (including offshore wind) which won't be subject to competition, and while auctions aren’t suitable for all, I see no reason why offshore wind projects, for example, shouldn’t compete with one another to ensure the most competitive prices.

The space left available for competition in the electricity market is shrinking; the energy department will effectively set the price for new baseload power through CfDs, and will have an increasing influence on the prices for new plant through the planned capacity market.

In this situation, it is crucial that Decc seeks to install market mechanisms into the process wherever possible to ensure that affordability is being properly considered.

The introduction of auctions for CfDs from the outset is good news for businesses, but Decc could go further and must, in future, place a higher priority on affordability in its ongoing challenge to balance decarbonisation, energy security and cost.

Richard Warren is senior energy policy adviser at EEF, the manufacturers' organisation.

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