Update on Contracts for Difference ( CfD’s)

As mentioned in my previous article the UK government had announced that the renewable industry would be moving to a CfD regime in 2017 and the old ROC scheme would be phased out. 

However, it was announced by DECC in May this year that this was now being brought forward to 31^st March 2015 for renewable developments over 5MW in size.

This caused the industry to take a sharp intake of breath as the ROC scheme was well understood and many investment decisions had been based on ROC’s still being available up to 2017.

Although the industry lobbied for the decision to be reversed, and a legal challenge brought by four major renewable players is still to be heard, it would seem that DECC’s accelerated deployment of CfD’s for larger developments will prevail.

The outcome of this decision is likely to drive the smaller players out of the larger development sector. This is because under the new CfD scheme a company can only bid for a CfD if it has planning approval, a connection offer to the grid and a signed lease agreement in place. 

Even if all these agreements are in place there is no guarantee of a CfD being obtained!

The cost of securing the above agreements for sites over 5MW runs in the tens of thousands and on sites over 20MW hundreds of thousands of pounds. These are very significant investments if there is no guarantee of outcome!

Therefore, whether it was the motive for DECC or not, it has effectively put a break on independent large-scale renewable post 2015 

The future for large scale Renewable Energy has now been placed in the hands of the big five energy companies and a few major international renewable players. 

GreenDay Generation will be continuing to develop renewable opportunities in the sub 5MW market post 2015 and particular will be focussing on developing relationships with local authorities and other statutory bodies to implement both renewable generation and carbon reduction schemes.

Future for ROC’s

1.0 Executive Summary

The future of the Renewable Obligation Certificates (ROC) scheme is becoming more transparent as the government has begun the process of putting flesh on the bones of both the new Feed in Tariff Contracts for Difference (Fit CfD) scheme that will replace the ROC scheme by 2017 and the winding down of the ROC scheme by 2037.

Between 2014 -17 period – Renewable Generators will be able to choose either scheme to enter into. It is important to note that once you have chosen your scheme you are bound for the 20 period.

The ROC/FiT CfD scheme will continue to offer the generator a 20 year agreement that will guarantee investors a safe and secure payback period.

Government existing and future ROC values can be view via the link

2.0 Background

The Government has confirmed that Renewable Obligation (RO) system will be “grandfathered” in such a way as to keep the system operational and effective beyond 2017, the proposed closing of the RO scheme to new entrants and its replacement by the new FiT CfD.

Currently the RO system creates a demand and thus a market for the ROCs scheme – the size of this market is calculated as the higher of either:-

(1) a fixed target of a certain number of ROCs per MWh; or

(2) the anticipated renewable energy generation plus a 10% “headroom” to ensure that demand exceeds anticipated supply.

2.1 Sustainability of ROC market

The government have concluded that it believes that there will still be a viable ROC market post 2027. Therefore, it has concluded that although many plants will drop out post 2027 the market will still be viable with government support up until 2037

2.2 How will ROC work post 2017

Once the RO scheme has been closed to new entrants, it would need to adapt in order to remain viable and effective and to provide equivalent benefits, by making sure that there is still demand for ROCs and that money is paid into the redistribution fund.

However, in 2017 the fixed target calculation would lose its relevance (or, at least, it would become wholly artificial) as a result of the existence of the two parallel regimes (the RO scheme and the FiT CfD) operating simultaneously – because the RO would itself no longer represent the entirety (and, in time, even the majority) of the UK’s renewable generation.

The Government has provided details on the proposed changes to the RO system following the 2017 switch. In doing so, they have divided the transition process into two stages – the period between 2017 and 2027, and the period beyond 2027.

For the intervening period, between 2017 and 2027, the UK Government plans simply to adapt the current RO system, by removing the fixed target calculation and instead using solely the second limb, of anticipated generation plus 10% headroom. That switch would ensure that demand for ROCs continues, with utilities continuing to maintain a share of their generation from renewable energy sources and continuing to pay penalties, which would then be redistributed, in the event that they miss their targets. As the 10% headroom will ensure that there will always be a gap and that demand for ROCs will always be higher than supply, ROCs should keep their value.

This would continue until 2027, at which point the plan is for the projects covered by the RO system to be transferred to a new, Premium Feed in Tariff system (distinct from the FiT CfD) in which it will fix the price of the ROCs for the remaining 10 years of the RO (i.e., until 2037) at its long-term value. The Government would buy the ROCs directly from the generators. This will reduce volatility in the final years of the mechanism. The long-term value of a ROC would be the buyout price plus 10% headroom as at 2027, and index-linked thereafter. This is intended to produce an equivalent benefit to the value generated by the ROCs.

This Premium Feed in Tariff would replace the ROCs, or the ROC element in a PPA, but would not constitute the whole payment under, or effectively replace, the PPA itself (hence the term “Premium”). The PPAs would still provide for income from the sale of electricity, augmented by the Premium FiT.

3.0 Conclusion

These plans are not set in stone. That said, the Government has consistently and repeatedly set out its commitment to “grandfathering” existing projects (so that the value of the RO system to existing projects is retained, even if incentives reduce for subsequent projects).

This is a logical and necessary step, not least given the reliance that the Government places upon the private energy market to provide the investment that the needs in order to meet demand.

Failure, by any government to hold firm on pre-existing promises would significantly threaten credibility and therefore investment.

It is worth noting that historically all UK governments – whichever colour -have always maintained their commercial commitments and as such the UK is seen as a safe place to do business and continues to attract significant inward investment accordingly.

Strike prices for the new FiT CfD market have yet to be set and therefore a true comparison to ROC’s cannot yet be made but strike prices will be available to potential investors/generators early 2014 so we await the government statement.

Renewable Energy – Gasification

The Energy and Technology Institute ( ETI ) have recently announced the three winners of their technology challenge to design cost effective 2 to 20MW gasification plants to operate on bio mass fuels.

Gasification is the old traditional process of making Town Gas from coal, although in the past this was a dirty process it was mainly due to the feedstock that was being utilised. The technology has been revolutionised over recent years and it is now viewed as a leading “waste to energy” renewable technology that attracts a high Renewable Obligation Certificate (ROC) tariff – currently 2 ROC’s.

Bio Mass is classed as a renewable energy source due the carbon dioxide being released during energy release being absorbed by the planets woods and forests to release the oxygen and produce new carbon within 25 years life cycle.
The gasification process heats bio mass material to very high temperatures to release its latent energy. Due to the high temperatures the material breaks down, releasing gas that is collected and used to drive turbines to produce electricity that can be exported to the local electrical grid .

This means that no harmful particles are released into the atmosphere as happens within the normal burning of bio mass materials.

The final ash material that is left can be used as a fertilizer mix or within road building products.
Many waste disposals companies collect and process suitable bio mass material and in the past the majority has had to be disposed via land fill or other non-environmental friendly ways.

This was the challenge for the 90 odd companies that entered the ETI challenge – and the three companies that have been successful use different approaches to designing a cost effective solution that can be used at the small to medium end of the market.

Green Day generation are happy to announce that we are working closely with one of the winners to build the first privately funded gasification plant in Sussex utilising this new technology.
It is believed that local generation of electricity from waste can play a major role in the UK journey to a sustainable future.

The Solar Market

Over the past 5 years the UK Solar Energy market has grown from a fledgling domestic business in the shadow of electrical power generated by Wind Farms to a large scale generator in its own right via the building of large scale Solar Farms and Parks.

Initial Government subsidies helped establish the UK Solar market and encourage private investment in both financing the schemes and building a robust supply chain from equipment manufacturers to installers.

The UK Government now believes that the subsidies have been successful in developing a robust Renewable Energy business model and are now tapering off the incentives it has introduced via – Renewable Obligation Certificates (ROC’s) – to both Solar and Wind over the coming years.
The net result of the reduction of the subsidies will see the withdrawal of the short term speculators leaving the responsibility of developing the UK Solar Park market to the long term serious players.

The initial areas of the UK that have seen the most Solar Parks and Farms to date have been Devon, Cornwall and South Wales. This has proved profitable as fallow land is available and the light is very good in those areas but the local network is becoming saturated and new connections are proving problematic in some areas..

Their remains excellent Solar generating opportunities in the South, South East and Central areas of the UK where networks are less constrained and high density urban areas mean that there is plenty of local demand to be satisfied.

Green Day Generation Limited identifies these land opportunities and obtain the necessary approvals and consents (the Intellectual Property ) and package the IP within a suitable contract that can be purchased by Solar Park builders.

The proposers have extensive technical and commercial knowledge of the solar market and every element of the solar supply chain. Over the past 5 years with their prospective clients, they have helped build and connect in access of 50MW of solar and wind power to the local grid, across South Wales and the South West of England