Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government
Issue link: https://fhpublishing.uberflip.com/i/495805
6 | 17TH - 23RD APRIL 2015 | UTILITY WEEK People & Opinion A win for Decc and for consumers Contracts for difference auction shows competition is better than centrally set "best guesses". View from the top Jonathan Brearley, director, Brearley Economics T hursday 26 February was a good day for the Depart- ment of Energy and Cli- mate Change (Decc) and, in particular, a good day for the Electricity Market Reform (EMR) team. The contracts for differ- ence (CfD) auction results were out and the strike prices were well below those we had ini- tially set centrally (in the case of onshore wind, a 17 per cent cut). Working out of government and in the energy sector means I have the pleasure of witnessing the pace at which new ideas are translating into more efficient generation and consequently lower costs. Therefore, it is no surprise that if civil servants are given the impossible task of set- ting a "fair" price for renewable power, then even with the best supporting analysis they are going to get it wrong and almost certainly are going to over-pay. If you imagine having to run an analytical process to "assess" costs in the sector, define the likely need for power from that sector and create a resulting supply/demand curve, then the results are going to be rough at best. Combining this with the usual elongated consultations (legally required) and a sec- tor constantly saying you have underestimated their costs, then it is not hard to understand why, in the light of the auction results, the previous "administrative" prices look high. Clearly, the auction is a win for Decc and is a win for consum- ers. However, it is also good news for the renewables sector. With costs and bills high on the pub- lic's agenda, we need to demon- strate that, as has been argued for the past ten years, costs will come down as renewables scale up. This argument looks much more credible with the auction results we have seen. For exam- ple, with offshore wind at a strike price of £114, the aim of reaching £100/MWh by 2020 looks achiev- able and further savings beyond this perfectly possible. Equally, these auctions put renewables in pole position for "winning" the low-carbon race. The new benchmark for estab- lished technologies is lower (with onshore wind, about £80/MWh, for example). Other sectors will struggle to match this – at least at that headline strike price. We still need baseload and do not yet have cheap ways of tackling the intermittency, so the overall comparison should not be on price alone. However, nuclear, for example, will need to make aggressive cuts from the Hinkley deal to remain a cost-effective competitor to renewables. So with the champagne corks popping in Decc, what could be improved? • More may be needed to tackle "winners' curse" – aggres- sive bids that are too low to deliver are a big problem in infrastructure auctions and clearly were a prob- lem here for solar. It may not be popular with all developers, but a "bid bond" where a security pay- ment is put down and lost if the project is consequently not deliv- ered could help tackle this. • Greater clarity on how much will be allocated to "pots" in future auctions – as soon as possible aer the election we need a clear outline of the likely pots for allocation until 2020. • A much more clear long- term direction of travel – over time, a much clearer view of budgets post-2020. Many projects are already spending signifi- cant amounts in the hope they are able to access CfDs. They don't need certainty now, but do need to know that the budget for low-carbon generation is large enough to accommodate them if they can deliver in this period. Finally, if there remain people hoping for a return to administra- tively set prices, I am afraid I can- not see Decc changing course. In fact, expect the opposite – Decc will want to look for greater com- petition between different gener- ation sectors. This is not simple, and Decc may rely on informal benchmarking between different generation types, but the vision of EMR is to return as soon as pos- sible to technology-neutral com- petition. This auction's results are a great step towards that. "Postponing the introduction of a mandatory code of practice at all is a terrible idea. Businesses simply don't know what they are paying for their energy. Ofgem has a responsibility to make the procurement process as transparent as possible" Charlie Lass, chief executive, Open Energy Market, on Ofgem's decision to shelve the introduction of a mandatory code of practice for commercial energy brokers