Energy companies involved in the latest contract for difference allocation round, designed to ensure profits, will enjoy boosted public funding, the government has said.
Some £22 million extra will be offered to renewable generators as part of the fifth contract for difference (CfD) allocation round, for which applications closed in April.
The 10% funding hike will see energy firms granted contracts, which ensure earnings, from a £227 million pot.
Most of the funding - £190 million - will be given to “established technologies” through the awarded contracts, including wind and solar.
“Emerging technologies” will also be allocated £37 million, the government hinted, including floating offshore wind.
Energy security secretary Grant Shapps dubbed the scheme a “lifeblood” for British-based renewables, adding it should boost investment in the growing industry.
Though the scheme does indeed aim to increase incentives for renewable energy developers by guaranteeing a price at which their energy is sold, allegations that some have looked to play the system have led to scrutiny.
So how does it work?
CfDs essentially guarantee energy companies gain a specific price for the power they sell.
This is by done agreeing to a predetermined ‘strike price’ for each megawatt of energy during the competition process, after which contracts are awarded to successful generators.
Companies then sell their energy as usual on the nation’s respective markets, being subsidised by the public if this is sold below the strike price, or paying back earnings if it is sold above.
At this point, it is important to note that UK energy prices are largely governed by the price of gas – including for the likes of solar and wind farm operators that may not even touch the stuff!
So what does this mean?
Renewable energy generators - who may once have been put off by high input costs - can rest easy knowing that whatever the direction of the wholesale market, their earnings are guaranteed.
The catch?
If wholesale prices soar, they don’t get to enjoy something that could have scored them humongous profits, given the requirement as per the CfD to pay back earnings above their specified strike price.
Given soaring energy costs, inflation and interest rates over the past year, some industry bodies have criticised CfDs for effectively capping earnings as companies’ costs rose.
Industry representative RenewableUK did just this on Wednesday following a meeting with Grant Shapps in Downing Street.
“The government can improve investor confidence in this space by ensuring that the contracts for difference framework takes account of the economic pressures faced by the sector,” policy director Ana Musat said.
Musat then – funnily enough - welcomed the government’s higher budget for the ongoing CfD round on Thursday, adding “sustainable pricing in future auctions” would also be warmly greeted.
Ironically, the amount allocated for round five is actually £58 million less than the £285 million granted in the fourth round last year, so what happens in round six next year remains to be seen.
The industry’s calls for higher strike prices were reflected by the development of one of Britain’s largest offshore wind farms being halted in late last July.
Citing poor “market conditions,” Vattenfall shelved its 1.4GW Norfolk Boreas project off the East Anglian coast, suggesting that even with CfDs, the plans were not economically viable.
Drax controversy
Another controversy relating to CfD’s came more recently though, as Drax Group (LSE:DRX) faced accusations on Wednesday of avoiding generating enough power from one of its biomass units to warrant repayments to the public.
Since last year, Drax has repeatedly reduced generation from Unit 1 of its North Yorkshire power plant, Bloomberg pointed out, from which energy prices are capped under the CfD scheme.
Given higher wholesale prices, the company would likely have sold much of the power above the unit’s £118.54/MWh strike price.
However, by choosing to generate from other units which aren’t tied into the contracts, and even selling unused pellets it burns to produce power, Drax essentially swerved the repayments.
This prevented £639 million from making its way back to households via their energy suppliers, Bloomberg found, which may well have helped ease bills.
Though Drax denied deliberately doing so, Former energy secretary Ed Davey accused the generator of acting against the “national interest” and playing a system designed to “protect customers”.
Whether it was indeed an intentional ploy remains to be seen, though what is certain is the exposure of the loophole in the UK’s contract for difference scheme.