The levy control framework (LCF) & contracts for difference (CfD) allocation what it means for the low-carbon generation mix

Transcription

1 The levy control framework (LCF) & contracts for difference (CfD) allocation what it means for the low-carbon generation mix Gareth Redmond 24 th September, 2014

2 Paid for through energy bills costs passed on to consumers, making close and careful control of planning how to allocate and control the LCF exceptionally important. The LCF It s how we pay to support deployment of low-carbon electricity generation principally via the feed-in tariffs (FITs), the renewables obligation (RO) and now, contracts for difference (CfD) The LCF is set at 4.3 billion in 2015/16 rising to 7.6 billion in 2020/21 2

3 Electricity market reform (EMR) EMR began in to secure investment to: Maintain electricity security of supply De-carbonise the electricity sector to meet carbon budgets out to 2030, and greenhouse gas emissions reduction targets to 2050 Keep costs to consumers as low as possible Policy designed Legal framework: The Energy Act 2013; and Secondary legislation came into force this year. So now it s about implementation: CfD allocation round opening in October Capacity market auction in December RO closes to new generation in

4 Contracts for difference (CfDs) A private law contract between a low carbon project and the Low Carbon Contracts Company (LCCC, a Government-owned company) Contract guarantees a strike price a payment is made to the generator for the difference between the strike price and the market electricity price, or re-paid by the generator if the market price rises above the strike price. Protects investors from electricity price uncertainty and allows potentially greater gearing and a lower cost of capital 15 year contract term Payments linked to CPI Flexibility over delivery and capacity Legal contract protections change-in-law, force majeure etc. 4

5 CfD Payments Strike Price & Reference Price CfDs how do they work? Strike price: - Determined by competitive bidding - No higher than the administrative cap Year 14/15 15/16 16/17 17/18 18/19 Max SP ( /MW 2012 Prices) Reference price - Determined by the day-ahead GB price Difference payment to generator Difference payment from generator 5

6 CfDs how are they allocated? and will be responsible for: Event will act as the delivery body and will run the allocation process for us - checking eligibility - running the auctions for three groupings - assessing affordable projects against budget Timing Established techs (incl. solar & onshore wind) Lessestablished techs (incl. offshore wind) Biomass conversion Indicative CfD Budgets published Allocation framework & budget notice issued Allocation opens for applications Deadline for applications Dispute Resolution processes Analysis of whether budget allocation is exceeded Sealed bids invited 6 July 10 working days ahead of allocation process Expected mid-october + 10 working days (varies) (varies) CfD award End 2014 Around mid November CfD signature Early January 2015 Eligibility criteria: - Qualifying generating station - No funds from other govt support - Applicable planning consents - Connection agreement requirements - Statement identifying the CfD terms & conditions that apply - Relevant supporting info - Supply chain plan (for facilities >300MW)

7 Low-carbon generation - now Nuclear Natural gas Petroleum Renewables Coal ELECTRICITY 8 % 35 % 32 % 4 % 20 % Source: 2013 DUKES Source: Energy Trends June 2013 ENERGY Source: UK Energy Trends March

8 and where we need to get to A legally binding, EU target to deliver 15% of the UK s energy needs from renewable energy sources. There are three elements to delivery of the target: Electricity where we need to deliver over 30% of our electricity needs from renewables; Heat - around 12% of our total heat demand in 2020 would have to come from renewables Transport - around 10% of energy used in transport in 2020 would have to come from renewables. The UK must secure a factor of ten increase in renewable energy over the period, compared with an average factor of two increase across Europe all while increasing demand means additional deployment is needed just to stand still 8

9 Low-carbon electricity ELECTRICITY METER TWh In 2013, renewable generation made up nearly 15% of the electricity consumed in the UK nearly 20% in the first quarter of That s half way to our target of 105 TWh. More than 20 GW of generating capacity has been installed up 25% & enough to power 13m homes. This is backed by resilient investment and a strong forward pipeline. Ernst and Young still assess the UK as being the number one international market for offshore wind; number seven market globally for investment in renewables. 9

10 offshore solar onshore biomass Technology deployment 3.7 GW capacity 11.4 TWh generated 3.2% total generation Power 2.7m homes (2013 nos.) 2.8 GW 2 TWh 0.6% 0.5m 7.5 GW 17 TWh 4.7% 4.1m 4 GW 18.5 TWh 4.2% 4.4m Supply chain developments & increased deployment will drive costs down Significant and rapid deployment above expectations proposed constraint of RO for >5MW solar Increasingly politically sensitive and subject, in some areas, to tighter planning controls. Subject to close scrutiny by EU competition commissioner GW capacity by 2020 (delivery plan) GW GW GW 10

11 hydro AD wave tidal Technology deployment Smaller, demonstration technologies with little deployment beyond R & D testing. Tremendous potential capacity and predictability. 0.1 GW by 2020 Small & farm-scale relatively low-level deployment through FITs GW by GW capacity & 4.7 TWh in % total generation. Limited further potential. 1.7 GW by 2020 Other smaller technologies: ACT ( GW) Ded. biomass w/chp ( GW) Energy from waste w/chp (0.4 GW) Geothermal (<0.1 GW) Landfill gas (0.9 GW) Sewage gas (0.2 GW) A mix of technologies to deliver around 30% of our electricity from renewables by Investment in more expensive technologies now to build supply chains and drive down costs. A mix designed to support security of supply and decarbonisation, supported by new nuclear, the capacity market and carbon capture and storage. 11

12 Risks and drivers None of this is straightforward! Delivery of EMR involves balancing a complex array of risks, pressures and drivers Consumer energy bills are a huge public concern. EMR and other support schemes need to recognise this. 12 Deployment needs to be affordable within the levy control framework which means careful modelling & recalibration Our programmes and support schemes must comply with EU state aid rules. Growth and jobs investment in new infrastructure brings jobs and growth and investment in supply chain reduces technology costs. Community involvement in generation projects is very important to Ministers Community Energy Strategy. Public support for renewables is high but varies according to location, technology etc. Security of supply ensuring that we have enough capacity to keep the lights on, long into the future.

13 13 Questions and contact details