Monday, 8 August 2011

UK’s electricity reforms to bring investment, structuring opportunities in renewables

The UK’s proposed electricity market reforms will tempt a wider range of investors to put money into renewables, and lead to a blossoming of structured products and financial services for developers, according to energy aggregator Smartest Energy.

However, the recently announced white paper on Electricity Market Reform needs many details to be elaborated before the full impact is understood, energy investors and developers warned at a seminar in London today, organised by the Renewable Energy Association (REA).

The white paper introduces the concept of feed-in tariffs (FiTs) with ‘contracts for difference’ (CfDs) to support renewables generation. This will gradually replace the UK’s Renewables Obligation, which puts the onus on suppliers to deliver a certain proportion of renewable energy.

The CfDs will guarantee that generators receive a fixed price (‘strike price’) for their electricity, by receiving a top-up on the wholesale price of electricity. The strike price will depend on the generation technology, and the top-up will added to the day-ahead wholesale electricity price for intermittent sources, such as wind, and on the year-ahead electricity price for dispatchable sources, such as biomass-fired power plants, which can be turned on or off on demand. However, if wholesale prices soar above the strike price, generators will have to give up some of their revenues.

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