Ofgem predicts higher costs for CHP and renewables targets

The Government may need to increase subsidies for renewable energy and combined heat and power (CHP) if it is to meet its targets for both technologies, according to energy regulator Ofgem. A report by the regulator confirms that the new electricity trading arrangements (NETA) have led to a drastic reduction in output from small generators.1

The renewable energy and CHP industries have long warned that they would be badly hit by NETA, not least because it penalises generators with unpredictable output. After the introduction of the new regime on 27 March, renewables generators reported reduced prices and even termination of contracts (ENDS Report 317, pp 11-12 ).

In February, the then Energy Minister Peter Hain responded to the concerns by asking Ofgem to examine NETA's impact on small generators with an output of less than 100MW. The regulator also conducted a parallel review of the regime's overall impact.

Ofgem concludes that during the first two months of NETA, export prices for small generators - mostly renewables and CHP plant - fell by 17%. This figure is less than the general reduction in wholesale electricity prices of 20-25% in that time. However, the effect on small generators appears to have been particularly damaging - their export volumes fell by 44% and their revenues by 53%.

In a letter to Energy Minister Brian Wilson, Ofgem's chief executive Callum McCarthy dismissed suggestions that NETA should be reformed to reduce the penalties paid by unpredictable "green" energy sources. He argued that doing so would "harm a central feature of NETA, namely that costs fall on those who give rise to them."

"It is entirely appropriate that, for green as for other generation, there should be an incentive for reliable and predictable generation," Mr McCarthy said. He saw "great advantage in encouraging those forms of [green] generation which are predictable and reliable" - a view which offers little comfort to the wind industry in particular.

Mr McCarthy concluded that the "welcome" fall in wholesale electricity prices means that the Government must recalculate the subsidy needed to meet its targets for renewables and CHP.

"Ofgem believes it likely that the cost involved in achieving the targets will be higher than has hitherto been estimated," Mr McCarthy said, "and, if so, that the Government should consider giving a higher level of support." His comments reinforce concerns that the price cap under the renewables obligation will thwart delivery of the target for renewables to generate 10% of the UK's electricity by 2010.

Ofgem's review also revealed that independent CHP operators have been particularly badly hit, suffering a 61% reduction in exports (see figure). The lower wholesale prices and penalties for unpredictable output under NETA have been compounded by a 31% increase in the sector's fuel costs over the past year.

Hydro and wind generators experienced price reductions of 11% and 27%, respectively. "Other renewables" - presumably including biomass, landfill gas, incineration and sewage gas - suffered a price cut of 26%. This is surprising, given that wind power is generally seen as the most unpredictable renewable technology.

However, there are questions about the authority of the report's findings. Ofgem used a sample of just 40 sites to compare prices and export volumes, and this included only a handful of individual technologies. Moreover, the prices identified in the survey largely reflect contracts which were negotiated before the start of NETA - prices are likely to shift as the regime gets into its stride.

Ofgem and the Department of Trade and Industry have argued that smaller generators can minimise their unpredictability by using "consolidators" to pool their output. However, smaller generators complained that few consolidation services have become available. Indeed, only one of the seven companies which expressed an intention to offer such services did any business - and with only one generator.

"NETA has only been operating for a few months," the report concludes. "In many respects it is too soon to say whether smaller generators are more adversely affected than larger ones."

Gaynor Hartnell of the Renewable Power Association - a new cross-technology association - pointed out that NETA's impact on renewables would have been even more severe without their exemption from the climate change levy, worth up to 0.43p/kWh.

  • A new Embedded Generation Co-ordinating Group has been established under the joint chairmanship of Ofgem and the DTI. It will orchestrate work on the recommendations of its predecessor (ENDS Report 312, pp 35-36 ).

    By January, the group will consider changes to technical standards, information provision, network design issues, connection charging and the implementation of micro-generation such as domestic CHP.

  • Ofgem has also published its environmental plan following consultation last summer (ENDS Report 307, pp 31-32 ).2 It identifies five priorities: grid losses, embedded generation, emissions trading, renewables, and energy efficiency. The regulator will report on progress by next March.

  • Related Environmental Services

    Powered by ENDS Directory

    Compliance Search

    Discover all ENDS content in one place, including legislation summaries to keep up to date with compliance deadlines

    Compliance Deadlines

    Plan ahead with our Calendar feature highlighting upcoming compliance deadlines

    News from ENDS Europe

    News from ENDS Waste & Bioenergy