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Cutting the cost of renewables for British Consumers

With a fifth of Britain’s ageing electricity plants closing over the next ten years,  and commitments to getting 30% of our electricity needs from renewables by 2020 and to cutting greenhouse gas emissions by 80% by 2050 – investing in new low carbon electricity generation is essential.  The really interesting issue is: how do we get this built and generating as cheaply as possible?

The Energy Bill that’s going through Parliament at the moment has the answer.  Contracts for Difference (CfDs) offer a set electricity price to generators – known as the ‘strike price’.  For every unit of electricity sold, the generator receives the market price for electricity, plus a ‘top-up’ payment, bringing the price they receive for electricity production up to the strike price. 

CfDs offer the cheapest way of delivering new investment.  Put simply, the certainty of income offered by CfDs reduces borrowing costs for investors.  This reduction in borrowing costs alone is worth £5bn of savings to society.  Furthermore, as CfDs reduce the riskiness of investing in renewables, we expect new investors to enter the market.
As investors face lower costs, the support required to bring on investment in renewables can be reduced too.

This is more cost effective than the existing Renewables Obligation (RO) which gives a market premium to renewables, but not a guaranteed price.  And risk and uncertainty drives up the price of capital.

It’s difficult to compare CfDs with the RO because the way they work and their durations are so different.  But, to illustrate the expected savings from the introduction of CfDs, this table shows the support costs per unit of electricity (MWh) needed to encourage investment in some example technologies, under the existing RO and new CfDs.

2012 (£/MWh) Under the RO Under CfDs CfD Saving
Onshore Wind 37 25 11
Offshore Wind 84 66 17
Biomass Conversion 44 41 3

So CfDs offer the best deal for British households.  They’ve been designed to bring on the amount of new green power we need, while avoiding excessive returns to investors. 

In addition, we can set strike prices lower over time as technologies mature and generation costs fall, they protect consumers against any large fuel price spikes (as a greater amount of our energy will come from renewables) and, if wholesale electricity prices were to rise above the ‘strike price’, generators will pay back to consumers. 

Our analysis shows that CfDs will save the average household consumer £62 or 9% annually on their electricity bills, over the period 2016 to 2030, than would be the case under RO.  Similarly, businesses can be expected to save around 10 to 11%.

CfDs will also continue the development of a green electricity sector, supporting jobs to spur growth in the wider UK economy.  This investment will help prevent climate change and ensure that the lights remain on in the future.

6 Responses to “Cutting the cost of renewables for British Consumers”

  1. Clive Best says:

    Cfd’s offer a guaranteed rate of return to investors of up to 20%. They are also essentially risk free. No wonder foreign investors are keen to build wind farms in UK! The benefactors are mainly large land owners. Unfortunately wind is randomly intermittent and would actually damage energy security on the Grid if it were to reach anything like 30% total capacity. Why do you think the Germans are building 15 new efficient coal power stations?

    There are days every month when the entire UK fleet of 4000 wind turbines produce a total output power < 0.1 GW.

  2. I think I understand how this might encourage investment in renewables by more companies. But I don’t understand how this will ‘offer the best deal for British households’. The best deal for British households is available energy as required when required at the lowest price. Is this idea going to deliver the energy required to the consumer at a lower price than would otherwise be the case?

  3. Andrew hodchild says:

    Nuclear not in table?!

  4. Robert P Morley says:

    Surely what householders need now is independent information on how to achieve a practical solution at a reasonable cost with a well defined payback period.

  5. Stephen Barr says:

    Hi

    interesting! A question tho?
    How is the ‘top up’ payment calculated and what is it based on?

    Thanks

  6. Matthew Sinclair says:

    Is this based on a certain year’s strike prices as announced, or it is just based on your estimated level of savings applied to a certain level of support in 2012 under the RO?

    With the strike price at £155 /MWh for offshore wind next year, does this imply you are expecting a wholesale electricity price of £89 /MWh or more? (In order for the amount of support needed to fall over time.) Or is there some other ingredient in these calculations besides the difference between the wholesale price and the strike price?

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