New analysis suggests a surprise rise in wholesale power prices means government could relax the renewables subsidy purse strings
Higher-than-expected wholesale energy prices have delivered a "windfall" for the public purse, according to a new analysis details how the cost of green energy subsidies has fallen by as much as 25 per cent.
Under the Contracts for Difference (CfD) scheme launched in 2015 the government promised to support new renewable energy projects by paying the difference between the wholesale energy price and the so-called "strike price" that gives developers a guaranteed price for their power for a set period of time.
The scheme is widely regarded as having been instrumental in rapidly reducing the cost of renewable energy sources such as offshore wind. But in November last year, citing cost concerns, the government announced plans to put the brakes on new CfD contracts beyond the current budget round until the oldest ones expired in the mid-2020s.
Yet new analysis published yesterday by the Energy and Climate Intelligence Unit (ECIU) think tank suggests an unexpected surge in the wholesale cost of power this year has cut the amount of money the government has to pay in 'top-up' funding for CfD projects by hundreds of millions of pounds.
Treasury forecasts from 2017 predicted the wholesale electricity prices for 2018/9 would be about £41 per MWh. But the price of coal, gas and a strong EU carbon price have all pushed wholesale power prices higher than expected this year, with prices averaging £57 per MWh. Taking into account the cost of power on the futures market for the next six months, the 2018 average is expected to hit £65 per MWh according to the ECIU analysis.
As such the £1.18bn the Treasury was expecting to spend on 'top-up' CfD costs this year could come down to £884m - a saving of £296m, nearly 25 per cent of the expected total.
If wholesale prices remain at their current level over the next decade the Treasury could save millions of pounds more, the ECIU said.
Although the total cost of the power sourced through CfDs does not change, the share paid directly by the government or the consumer can vary and as such ministers should be open to re-examining their spending plans for green energy, the ECIU argued.
The think tank's head of analysis Jonathon Marshall, who compiled the research, said ministers should consider supporting new projects using the extra cash that had been freed up in the budget.
"Having used forecasts of escalating renewables' support to lobby for funding cuts, Treasury now finds itself overseeing less spending than thought," he wrote in a blog post. He addd that there is "obviously a case" for the Treasury to use the spare cash to reinvest in more low-carbon contracts, a move that would boost the UK's progress towards meeting its legally binding climate targets.
"With the cost of funding these contracts falling, the government is left with two options; to boost spending on new renewables, or to bank the savings and offset some earlier and more expensive projects, such as those funded through feed-in tariffs," Marshall told BusinessGreen.
The Department of Business, Energy and Industrial Strategy (BEIS) has earmarked £557m to spend on new green energy generation through to 2025. It also argued at the time of the November 2017 Budget that falling green technology costs mean the industry is delivering more power for less cash, and should now be weaning itself off government support.
"Details of the 2019 CFD allocation round will be published in due course," a spokeswoman added in response to the ECIU analysis.
But green power experts point to the rapid scale-up of clean power capacity still needed to shift the UK away from fossil fuels, replace its ageing nuclear fleet, and meet its carbon targets. They argue the roll out of new renewable generation is nowhere near as fast as it needs to be, nor could be, and say developers need the certainty offered by the CfD contracts even if the amount actually paid via subsidy is falling.
The CfD scheme has proved extremely successful at driving up the UK's renewables capacity, but could a more flexible approach to budget allocations now deliver even more bang for our buck without having any further impact on consumer energy bills?
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