On 17 October 2018 Cornwall Insight hosted a successful and well attended event where the future of support for renewable power generation, against the backdrop of the significant gap between current deployment levels and what must be delivered to meet decarbonisation goals, was discussed.
Cornwall Insight experts discussed how although wholesale prices are currently high, the power price “captured” by wind and solar projects is set to fall over the next decade due to the “cannibalisation effect” owing to the continued deployment of intermittent generation. This means in effect that as more and more renewables are deployed, the wholesale price itself is pushed down. This creates an environment where it is extremely hard for investors to back renewables solely on the basis of future wholesale power prices.
This is presents real problems for investors, not least as National Grid predicts that to meet a pathway that sees climate change limited to 2°C, 129GW of renewables will have to be in operation by 2050. Currently 39GW of renewables are deployed in GB, with many of the earliest projects coming to the end of their lifespans and in need of repowering.
Also debated were the merits of proffered solutions such as Power Purchase Agreements (PPAs) and renewables winning contracts under the Capacity Market. Some PPAs offer floor prices, but they are typically less than £20/MWh – far below the level needed to make them viable on their own. A market-led alternative to provide long-term price stability is a corporate PPA, whereby there is a contract between a creditworthy major energy user and a renewables developer. Whilst this is a popular route to market in other jurisdictions, including the US and parts of Europe, there are complexities for widescale adoption of these contracts in GB and our experts do not believe they will pull through sufficient investment in new renewables projects.
Wind and solar may be able to offer services to National Grid in future, through the Capacity Market and balancing services, but this will not provide enough stability for investors and under current rules they face a prohibitively low “de-rating factor” – essentially a measure of the forecasted availability of an installation in the case of a potential system stress event.
We presented our preferred solution to help call forward investment in new renewables: a policy intervention through a floor price Contract for Difference (CfD) mechanism. Under a floor price CfD, contracts would be auctioned in the same fashion as today, but applicants would bid in the floor price, rather than the fixed price payment they require to make the project investable. If wholesale power prices fall below the floor price, then levy-funded payments would be made to the recipient up to the floor. Where wholesale power prices rise above the floor again, the recipient would not receive the positive difference until they had paid back floor payments received. The benefit of this approach is that it is not a subsidy, but instead supports investment at no extra cost to consumers over the long-run, keeps the costs of renewables falling overall, and will see competitively-priced projects will continue to come through to help meet 2050 emissions targets.