npower’s Wayne Mitchell’s Energy Blog

What the changing green scene means for business There’s no disputing, Britain needs more green energy if we are to successfully make the transition to a low-carbon economy. The soon-to-be-introduced […]

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By Geoff Curran

What the changing green scene means for business

There’s no disputing, Britain needs more green energy if we are to successfully make the transition to a low-carbon economy. The soon-to-be-introduced Contracts for Difference is the key mechanism which the government hopes will kick start the necessary investment in more renewable and low-carbon generation. Not only do we need to attract around £110-billion by the end of the decade to build the infrastructure required, we also need to ensure it enables us to reach our targets to reduce emissions by 80% on 1990 levels by 2050. But what will Contracts for Difference (CfD) mean for businesses?

Of course, the primary impact is going to be increasing energy costs to fund the investment. Our policy experts at npower estimate this will translate to around £8-10/MWh by 2020. But the effects are further reaching; CfDs will potentially close down a small but thriving renewable partnership between some businesses and third-party generators but may also provide a further incentive for consumers to reduce usage on site by energy efficiency or on-site generation where suitable.

Attractive incentives

The current FiT regime will remain in place for smaller scale generation projects which, if installed on site, will be offset against your consumption volume. Also potentially opening up other revenue opportunities from the use of your on site generation to help balance the Grid while reducing exposure to increased CFD costs.

For companies wanting to go down the route of fixing long term power costs in the future, they could look to ‘sleeve in’ renewable via a direct agreement with a third-party generator, courtesy of a power purchase agreement (PPA) netting arrangement. We work with a number of large companies who already do the latter, whereby they agree to pay the renewable generator a fixed price for every megawatt hour generated for ten, 20 or more years, and then offset that volume against their own consumption requirements.

The end of PPA netting?

Historically, PPA netting arrangements have provided greater certainty for both consumer and generator. But will the new CfD change this option? The new fixed prices under CfDs mean that low-carbon generators will receive a guaranteed top-up if the wholesale price falls short of the pre-agreed strike price. As this wholesale price/top-up ratio is likely to vary month by month – day by day even – agreeing a fixed price up front with a third-party may no longer present as attractive an option for them.  For companies looking to work in partnership with developers, or already in the process of doing so, this could make it too expensive or complicated to agree, thus removing the ability to PPA net for new projects and stop development of the current long term wholesale price certainty that the current PPA netting brings for both renewable developers and businesses.

Tell us what you think

In this ever-changing market, we are especially keen to find out what you think and represent your views on energy policy such as CfD to DECC. We’ve already conducted a survey looking at business understanding of Electricity Market Reform and reactions to the CfD exemption consultation in our Pulse 1 survey (see results here). Now we are keen to see how your views have changed – and in particular, assess the impact of CfD on any plans to invest in renewable generation or enter into PPA netting arrangements.

Our Pulse 2 survey is clear and succinct and will only take a few minutes to complete – you can access it here. Your views matter, so please do let us know what you think. Once we’ve analysed the findings, I will report back on the results and the reaction from DECC.

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