In its response to a Department of Trade and Industry consultation on reforming the RO, the scheme’s administrator, Ofgem, says it needs a radical overhaul because it is too expensive.
The regulator argues that the cost of abating carbon under the scheme, up to £481 per tonne, is a “very high” price relative to other policy measures.
“The subsidy generates returns to investors that are greatly in excess of the economic costs of generation,” it adds.
The government’s plan to give emerging technologies more support per MWh of electricity than others has the potential to “significantly increase” costs to consumers.
It would also set bands with “limited” information on the future costs of technologies. If the bands are set too high, an “excessive number” of projects will come forward leading to high costs for consumers. If too low, there will be no development.
“It is impossible to determine what the impact on investment might be,” Ofgem concludes. “We do not think that the proposals have been rigorously analysed and we advocate a more fundamental rethink before proceeding further.”
Instead, says Ofgem, companies should bid for long-term renewables contracts with fixed rates of return linked to the wholesale electricity price. Under this system, the level of support would fall as the price of electricity rose, preventing developers making excessive profits.
Ofgem denies that its proposals would favour existing technologies like onshore wind because developers would have to consider the effects of planning delays.