Energy UK has backed proposals to offer Contracts for Difference (CfDs) to existing low-carbon generators as a way to lower electricity bills for consumers.
The trade body said the measure could initially cut annual electricity bills by £10.8 billion to £18 billion for domestic consumers – equating to a saving of £150 to £200 for a typical household – and by £6.7 billion to £11.1 billion for non-domestic customers.
The voluntary scheme, which was initially proposed by the UK Energy Research Centre (UKERC) in April, would allow both nuclear plants and renewable generators with existing Renewables Obligation (RO) agreements to bid for CfDs in what UKERC dubbed a “pot zero” auction.
The RO scheme, which closed to new applicants in 2017, pays subsidies to generators on top of the wholesale price for electricity, meaning they have benefitted significantly from the unprecedented rise in electricity prices over the past year.
Under the Contracts for Difference scheme, generators receive a guaranteed price for the electricity they produce, either receiving or returning any difference between this strike price and wholesale electricity prices.
With wholesale electricity prices at record-high levels, generators that secured these agreements would initially return money to consumers via the contract counterparty, the Low Carbon Contracts Company. Energy UK said generators with CfDs are already expected to return £23 to the typical domestic customer this winter.
In exchange for forgoing these revenues, generators would gain the long-term certainty over revenues provided by CfDs, which Energy UK said could be offered with terms of between 10 and 20 years.
Energy UK said this would avoid “destructive” short-term interventions in the market and would be significantly better than the “damaging” windfall tax on generators at one point being considered by the government, “enhancing rather than destroying investor confidence.”
It said the scheme would be a significant first step towards decoupling electricity prices from gas prices, allowing the government time to address the issue over the longer term through its Review of Electricity Market Arrangements, which it warned “will need to be done carefully to avoid any unintended consequences”.
The trade association has proposed two alternative versions of the scheme – one in which generators would continue to receive RO payments and another in which generators would also forfeit these subsidies.
It said the latter option would lead to bigger bill reductions in the short term but would not necessarily lead to greater savings overall as the loss of these subsidies would be priced into generators bids for CfDs.
Given industry hedging, Energy UK said the proposals would not be practical to implement this winter, but could down power prices from Autumn 2023 and beyond, adding: “Implementation before this point could exacerbate existing tensions in the market if generators are forced to buy back hedges.”
Adam Berman, deputy director for Energy UK, said: “The current energy market doesn’t allow customers to fully benefit from the cheapest form of electricity – domestically produced low-carbon generation. This proposal could reduce bills by up to £18 billion per annum, delivering much needed cuts to bills for both households and business customers.
“By giving generators the chance to secure a longer term agreement with lower returns in place of selling electricity at wholesale market prices, this scheme would be a significant first step to decoupling gas from retail electricity prices. Removing the link between gas and retail electricity prices will be complex and take time, but this solution provides a quick fix for up to 40% of our generation capacity.
“Much will depend on the details of the scheme, but with gas prices likely to remain high for some time, we are confident that it can deliver significant savings for customers next year.”