Contracts for Difference auctions must be reformed to fill a looming hole in the UK’s carbon budgets, Cornwall Insight has argued in a new report.
The energy consultancy says the amount of renewable generation procured in the auctions should be determined by volume targets measured in megawatt hours rather than subsidy budgets measured in pounds.
According to the report, titled ‘Turn up the Volume’, the current “spend and hope” approach creates “inherent uncertainty” as to whether enough renewable power will be secured to meet emissions targets.
Although it concedes there are “merits” to monitoring and controlling costs to consumers, the report says the present method of doing so is “so crude and subject to erroneous and dynamic assumptions” it is not even clear whether it works.
Recent proposals to reform the wholesale reference prices used to determine the value of the contracts demonstrate an “implicit acceptance of the complexity of the current approach, and the risk of getting it wrong.”
The paper also highlights uncertainty over the timing of auctions and delivery years.
In October 2017, the government pledged provide up to £557 million of annual subsidies in future auctions for less established technologies in line with the cap on low-carbon subsidies imposed by the Levy Control Framework (now the Control for Low Carbon Levies).
The first of these auctions is due to take place in May 2019. Energy and clean growth minister Claire Perry announced in July that further pot 2 auctions would follow once every two years.
Additional funding will be only be made available if there is a reduction in the overall cost of subsidies, freeing up more space under the cap.
But the report says there is no guarantee this will happen and, even if it does, the first projects to benefit would not be commissioned until the late 2020s.
“More critically,” it warns, “developers are unable to pin-point accurately which delivery years will be available and in which auction. This is a weak entry signal and will not effectively stimulate a long-term pipeline if left to continue.”
Holding annual volume-based auctions aligned with the UK’s carbon budgets would give investors “greater clarity about the direction of long-term procurement targets which will grow or reduce depending on our overall proximity of low-carbon volumes to decarbonisation commitments.”
“It would also give absolute clarity over the rhythm and delivery years that successive auctions would open up,” it adds.
The report additionally calls for greater alignment between the Contracts for Difference (CfD) and capacity market mechanisms. It recommends that the CfD auction for a particular delivery year be held in advance of the corresponding four-year-ahead (T-4) capacity auction.
Whilst the pre-qualification process for the capacity market effectively provides a market-wide census of the operating intentions of the entire thermal fleet, “there is no such visibility with regard to existing low-carbon and renewable capacity”.
The report therefore argues that the procurement targets for both sets of auctions should be based on a transparent view of the intentions of existing plants for the relevant delivery years.
Taken together, these changes would allow the procurement targets for capacity auctions to properly account for the volumes of new renewables that will be on the system. They would also signal there is no trade-off between security of supply and decarbonisation: “Rather decarbonisation leads the way with the capacity market procurement shaped around it.”