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Offshore Wind Journal

Ofgem review could affect investor confidence and slow down offshore wind deployment

Mon 11 Feb 2019 by David Foxwell

Ofgem review could affect investor confidence and slow down offshore wind deployment
RenewableUK says proposals set out in Ofgem’s targeted charging review could increase the cost of energy, affect investor confidence and slow down deployment

Generators in the UK face additional charges that a leading trade body believes could increase costs and damage investor confidence in offshore wind and other forms of renewable energy.

As highlighted previously by OWJ, a review being carried out by Ofgem, the government regulator for gas and electricity markets in Great Britain, could have an adverse impact on the UK’s offshore wind market and on upcoming contracts for difference.

RenewableUK senior policy manager Rebecca Williams told the 2019 Offshore Wind Journal Conference that changes proposed by Ofgem as part of its Targeted Charging Review (TCR), a process launched late in 2018, could have a significant potential impact on deploying renewable energy and run counter to the government’s clean growth and decarbonisation goals. RenewableUK believes that the proposals could slow down deployment and reduce the overall volume of ‘subsidy-free’ renewable generation by increasing costs and risk.

Transmission network use of system charges (TNUoS) are made up of different kinds of charges, including demand locational, demand residual, generation local, transmission generation residual, circuits and substations charges. The changes to charges that could affect the cost of offshore wind in the UK are the transmission generation residual element.

“It is helpful to think of these as lines in a total company budget,” Ms Williams told OWJ. “The one of interest here is the transmission generation residual. Ofgem is proposing changes to how this is calculated.

“This means a sudden and unforeseen increase in the amount that generators have to pay in terms of charging. This could significantly affect levelised costs of energy of larger onshore wind and offshore wind projects. You could think of this as being similar to an overhead that a business incurs, such as rent suddenly increasing.

“Due to the complexity of the issue and time available in which to comment RenewableUK is still analysing the actual impact that the proposals will have on future contract for difference (CfD) auctions.

“However, the direct impact on CfD strike prices and the ‘feedback loop’ of damaged investor confidence will have an adverse impact on cost of energy.

“Any increase in the cost base or regulatory uncertainty for offshore wind is likely to manifest itself in increased strike prices in CfD auctions, with consumers eventually paying for the cost of grid charging reform through CfD top-up payments.”

Allocation Round 3 developers will have to meet ambitious administrative strike prices of £53-56/MWh (US$69-72/MWh). “We anticipate the additional cost to generators of Ofgem’s targeted charging review proposals will be substantial and this will obviously have a bearing on the prices developers can achieve,” Ms Williams said.

Ms Williams also noted that Ofgem is proposing to introduce the new changes from 2021 onwards, but the proposals (which are currently at the ‘minded-to’ stage) will have implications for future CfD rounds.

In a recent blog, Ms William’s colleague Nathan Bennett, RenewableUK’s senior public affairs manager said, “The government’s stated policy position is to create an energy network with increasing renewable generation, increasing decentralisation and increasing flexibility, serviced by a smart management system. This will save consumers an estimated £8Bn a year according to the National Infrastructure Commission.

“The problem with the TCR is that it will totally cut across this ambition. It will hinder the deployment of new renewables, and deployment of smart, flexible energy solutions – and it is unclear how beneficial any of that will really be for consumers.”

Mr Bennett wrote that the failure “stems from a number of sources.” He claimed that Ofgem appears not to understand the current financial landscape in which large-scale renewables operate.

He also highlighted the fact that the CfD auctions used to procure offshore wind “are incredibly competitive” and that absorbing additional costs would be very problematic as would renegotiating contracts for projects that are already commissioned.

“I think the key point we just want to get across is the huge uncertainty that this is creating, and the fact that the TCR is completely at odds with the government’s stated clean growth agenda,” Ms Williams concluded. “The package of reforms is wider than just for transmission connected generation – it also severely affects distributed connected generation.”

RenewableUK has co-signed a letter along with other trade associations that have expressed their concern about elements of the review. Responding to Ofgem’s consultation, RenewableUK said, “The further deployment of renewable energy is critical… We have significant concerns that the proposals outlined in the TCR are of particular detriment to the renewable energy industry, jeopardising further project development, damaging investor confidence in the sector, and threatening schemes already operational and/or with support contracts secured (as acknowledged by Ofgem in the consultation document). It is of particular concern that decarbonisation was excluded from the assessment criteria, when this is a central plank of the UK’s energy policy and long-term consumer welfare. We are deeply concerned that the impact of the proposals… will threaten the sector’s progress.

“The impact assessment does not take account of the impact that the TCR will have on the deployment of renewables, on cost of energy, or on emissions. We consider this a significant failing in Ofgem’s approach to the analysis. The potential impact on renewable energy, worst affected by the proposed changes set out in the TCR, completely contradicts the wider government policy ambitions as set out in the Clean Growth Plan and the Industrial Strategy.”

RenewableUK’s response to the consultation can be found here.

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