The energy sector has thrown its weight behind a proposal to bring in fixed contracts for existing generators, to help provide them with long-term security and reduce consumer bills in the short-term.
Originally pitched by the UK Energy Research Centre, the approach would see nuclear and renewable generators that are supported by the Renewables Obligation (RO) subsidiary offered new voluntary, long-term, fixed contracts.
Currently, projects developed under the RO – which closed to new renewable projects in 2017 – trade their power on the market and receive a fixed amount of subsidy to cover the investment cost of the more expensive, older renewables.
Under the new scheme, the market power price would be replaced by the fixed price within the new contract. The market power price is set by gas. Therefore, by switching to a fixed price, consumers would be more shielded from volatility and record high gas prices currently being seen.
“It makes no sense to allow the exorbitantly expensive cost of gas to set the price for the whole of the electricity market,” said RenewableUK’s CEO Dan McGrail.
“This proposal is a step forward towards breaking that outdated link. It will enable billpayers to benefit more from the vast amounts of low-cost electricity being generated by wind and other renewables, which are our cheapest new power sources”.
According to Energy UK, the proposal could reduce energy bills by between £10.8 billion and £18 billion per annum from next year. This would equate to a £150-250 saving for a typical household, in addition to a £6.7 billion to £11.1 billion cut for non-domestic users.
The price cap for the upcoming winter period has been set at £3,549, an increase of around 80% from its current level. This is expected to push the number of UK households in fuel poverty from 4.5 million last October to 8.9 million this October, according to National Energy Action.
As such, action to reduce bills by taking better advantage of the low cost renewables already on the system has been welcomed by trade associations Energy UK and RenewableUK.
“We’ve been discussing these proposals with our member companies in detail to ensure that the changes are designed in the right way and are fully deliverable, so that we can maximise savings for bill payers,” added McGrail.
“We’re keen to work collaboratively with the Government and a wide range of other organisations to explore how we can put a new scheme in place in an expedient way. The proposals put forward so far have widespread support among our members and further discussions are taking place.”
The new contracts would build on the Contracts for Difference (CfD) scheme, which similarly offers generators a guaranteed strike price. This means that when generators sell power onto the wholesale market when prices are above this level, they return the surplus profits to consumers.
Given the record high wholesale power prices over the last year, generators with CfD contracts are currently predicted to pay back £23 to the typical domestic customer this winter, according to Ofgem.
The latest CfD round saw almost 11GW of onshore wind, offshore wind, solar, tidal energy and other forms of renewable energy secure contracts at record low strike prices.
“By giving generators the chance to secure a longer term agreement with lower returns in place of selling electricity at wholesale market prices, this scheme would be a significant first step to decoupling gas from retail electricity prices. Removing the link between gas and retail electricity prices will be complex and take time, but this solution provides a quick fix for up to 40% of our generation capacity,” said Adam Berman, Energy UK’s deputy director.
“Much will depend on the details of the scheme, but with gas prices likely to remain high for some time, we are confident that it can deliver significant savings for customers next year.”
Within its Review of Electricity Market Arrangements (REMA), the government is looking to address low carbon generators with RO contracts benefitting from high wholesale cost of electricity due to gas, allowing consumers to truly take advantage of the growing number of renewable projects in the UK.
But this fundamental reform of the wholesale market will need to be done carefully so as to avoid any unintended consequences, Energy UK said. As such, this new proposal from the UK Energy Research Centre would work as a significant first step in decoupling gas from electricity prices, whole allowing further time for long-term reform.