Energy and clean growth minister Claire Perry has been urged to support the continued growth of mature renewables by offering generators a new type of contract for difference.
Under the arrangements proposed by Cornwall Insights chief executive Gareth Miller, contract holders would be guaranteed a minimum price for the electricity they produce.
If the wholesale price fell below this “floor”, they would be entitled to receive top-up payments to close the gap. If the wholesale price exceeded the floor, they would be allowed to keep the difference, but only once they returned any previous top-up payments.
Renewables considered to be more established by the government such as onshore wind and solar have been excluded from contracts for difference (CfD) auctions since the first round in 2015.
But in a letter to Perry, Miller said it is “inconceivable” the government will be able to meet its targets for decarbonising the power sector unless they are given access to some form of revenue stabilisation: “Projections show that significant capacity needs to be delivered from these technologies if we are to achieve the decarbonisation pathway to 2050.
“Currently, the government assumes that this can be delivered at scale without material policy support. Whilst there have been significant reductions in costs in onshore renewable technologies, this does not make investments credible in projects if they are to rely predominantly on wholesale power price signals.
“As costs fall, modelling may show that long-term wholesale power revenues over the life of an asset will deliver a positive return on investment. However, project funding from banks and other risk-averse investors still requires insulation against short-term, substantial swings in wholesale power prices.”
Miller said the issue is being exacerbated by the depression of wholesale power prices by existing renewables with low marginal costs – a phenomenon known as price cannibalisation.
As wind and solar output is tied to the weather and therefore highly correlated across different installations, the prices generators are able to “capture” tend to be below the average for baseload generation.
“With greater deployment of renewables, the outlook for the captured price of wind and solar gets more pessimistic over time, and this is now feeding through into long-term price projections used in financial models,” he explained. “In addition, the wholesale markets are becoming ever more volatile.
“From our experience of working with major providers of capital, such as banks and other risk averse investors, they are unlikely to invest large amounts of capital in projects which face these kinds of risks.”
He said the price floor model would provide an “elegant” solution to this “impasse” – limiting the risks to investors while also minimising the costs to consumers.
Signatories to the letter include the Renewable Energy Association, the Solar Trade Association and Lightsource.
In November, the government provisionally allocated £60 million of annual subsidies to the next CfD auction due to take place in May 2019.
Speaking to Utility Week shortly afterwards, Miller raised concerns that strong competition for contracts could push developers to bid at excessively low prices that they are ultimately unable or unwilling to deliver. He urged the government to strengthen delivery penalties to prevent the emergence of the so-called “winner’s curse”.