Innovative Energy Consultancy Ltd
Innovative Energy Consultancy Ltd

Gov’t announces reforms to key energy schemes

Recently there have been a number of major changes to key government energy schemes, including multiple amendments to the Contracts for Difference (CfD) scheme and Capacity Market.

On 15 December BEIS issued a consultation exploring a range of proposed amendments within six main areas of the CfD scheme, which provides support for new low-carbon electricity generation projects. The proposed changes are linked to a government wide strategy to cut emissions, increase efficiency and help lower households’ and businesses’ energy costs.

Support for remote island wind

These changes included a new proposed definition for remote island wind, which would classify it as a new technology, allowing it to compete in future auctions for “less established” technologies. This aims to provide support for the future deployment of onshore wind projects on remote islands, where they can benefit local communities. The proposed change suggests defining a remote island as an island “located in the territorial sea of the United Kingdom, other than the part adjacent to Northern Ireland; and where all parts of its coastline are situated at least 10 kilometres from mainland Great Britain”.

The consultation suggests that in order to qualify as a remote island wind CfD unit, a project would need to be located on a remote island, with the connection between the unit’s generation circuit and the Main Interconnected Transmission System (MITS) providing a minimum of 50km of cabling, of which 20km must be subsea cabling. Finally, upon completion, the project must be connected to the national transmission system of Great Britain.

Changes to address risk of higher than expected load factors

The government is also proposing two changes to mitigate the risk of a generator’s load factor reaching a higher than expected level having won a CfD. Higher than expected load factors mean the subsidy paid by suppliers increases, the cost of which is ultimately recovered through levies on consumer bills. The first proposal suggests using higher forecasts of generation, set centrally by the government, when valuing CfD applications at the time of allocating contracts.

The second proposal requires successful generators to provide the Low Carbon Contracts Company (LCCC) with their most accurate estimates of expected electricity production during the contract term. These changes should reduce the risk of overspending in future allocation rounds and enable more accurate forecasting.

The consultation proposed modifications to what are considered advanced conversion technologies (ACT) in future CfD auctions. This would ensure only innovative and efficient plants are awarded subsidies. The proposed ACT definition seeks to make a clear distinction between ACTs and projects that use conventional combustion, such as energy from waste and dedicated biomass.

The new amendments suggest three criteria that ACT generators in future allocation rounds will be required to meet. These are: efficiency of the process; quality of the syngas or synliquid; and separation of the gasification of liquification process and the production of electricity.

Increase efficiency required for CHP projects

Furthermore, changes are being considered to the overall efficiency requirements for Combined Heat and Power (CHP) systems in the CfD to ensure that CfD supported CHP plants have suitably high overall efficiency. However, current efficiency requirements in GN44 mean that it is possible for CHP schemes to qualify for substantial levels of CfD support, whilst only producing a low level of useful heat, and consequently achieving low levels of overall efficiency.

The consultation proposed three ways to prevent this issue:

  • Apply the CHPQM only to those technologies that must deploy with CHP in order to be eligible to take part in the CfD scheme (currently biomass with CHP and energy from waste with CHP projects)
  • Increase the efficiency requirements provided for in GN44 (against which those two technologies will be assessed), and
  • Make amendments to how the eligibility requirements for dedicated biomass with CHP and energy from waste with CHP projects are set out in CfD regulations

Amendments to the Capacity Market

Alongside these changes to the CfD scheme, the government has also made a number of amendments to the Capacity Market mechanism.
On 4 December the EMR Delivery Body (National Grid) published its final Duration Limited Storage De-rating Factor Assessment, which set out the updated de-rating factors for storage sites participating in the CM.

The changes follow concern over the volume of storage that may be procured during the 2018 auction. This centred around the fact that any capacity procured that was duration limited could lead to an inefficient auction outcome, and subsequently lead to increased costs to consumers.

Before the changes all storage sites competing in the auction were awarded capacity payments based on a 96.11% de-rating factor (based on pumped hydro stations). Following the changes, storage assets in the CM will be awarded de-rating factors based on the duration they are able to discharge at full capacity.

Commenting on the decision, Frank Gordon, Policy Manager at the Renewable Energy Association said: “The Capacity Market is an ever more crucial mechanism for delivering battery projects, which underpin the additional electricity system flexibility that is so urgently needed in the UK. The changes unveiled today are slightly less drastic than those first proposed but could make it harder for a number of battery storage projects to compete.”

Early January also saw a decision from National Grid that reduced the amount of capacity procured through the T-1 auction for delivery in 2018-19, and the T-4 auction for delivery in 2021-22.
The document, published on 2 January, recommended that 4.9GW be procured in the T-1 auction, and 49.5GW in the T-4 auction. These recommendations are 1.1GW and 0.6GW less respectively than National Grid suggested in the guidelines it published for the auction in August 2017.

The recommendation for the T-4 auction is also reduced from the 51.7GW target set for the previous T-4 auction – for delivery in 2020-21. This is expected to lower prices.

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