RWE’s UK country chair has called on the government to reform how it calculates Contracts for Difference (CfD) budgets.
Tom Glover (pictured) said that, with the AR6 auction on the horizon, the ability of the CfD to procure at these levels is being undermined by the current approach to setting CfD budgets, which “needs a significant and urgent rethink”.
Glover argued that the current approach seriously overestimates the cost of each megawatt of renewables on consumer bills.
In addition, the forecasts of future market prices that are being used in CfD auctions (and which are used to assess the amount of “top-up” needed for CfD payments) are very low compared to prevailing market views, he said.
Futhermore, the estimate for the load factors for offshore wind are significantly higher than we see in practice, Glover argued.
He said: “This means there is an assumption that every megawatt bought in the auction requires a higher level of ‘top-up’ than the markets consider to be reasonable.
“This results in a more rapid depletion of the auction budgets, leading to fewer megawatts procured than would be the case if market-reflective assumptions for future power prices and more realistic load factors were used.
“In a nutshell, for every pound budgeted in CfD auctions, fewer MWs are procured.”
Glover added that, by using market-reflective assumptions for future power prices, which are available from independent market forecasters, and evidenced historic load factors rather than the current assumptions being used to set CfD budgets, the CfD auction could procure MWs at a cheaper, more realistic price.
This gives government more flexibility to procure the MWs needed to make up for the failure of AR5, and deliver a very successful AR6 whilst reducing the budget required for this success by potentially billions of pounds per year, he argued.
Glover added: “Fundamentally, we see this as a required shift in mindset from government to a more market reflective and realistic approach of value maximisation, continuing its already demonstrated willingness to increase CfD administrative strike prices in line with current market pressures.
“We urge a rapid rethink and realignment on future power price assumptions – and load factors for offshore wind – that we believe will ensure the CfD will be able to procure the volumes needed to meet stretching renewables targets, whilst also increasing energy independence and ultimately ensuring the wider economic benefits of the renewables industry are seen by UK consumers.”