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Business Green: Will the strike prices hit their target?


The renewable energy industry has cautiously welcomed new draft strike prices for low carbon energy projects, but warned it is too early to say if the contracts on the table will deliver the £110bn of energy investment required by 2020.

The Department of Energy and Climate Change (DECC) yesterday unveiled its long-awaited draft strike prices for 14 green technologies, excluding nuclear power and carbon capture and storage, which are expected to be confirmed later this year.

The government said it has designed the strike prices for the new Contract for Difference (CFD) mechanism to broadly mirror the level of support available through the existing Renewables Obligation Certificate (ROC) regime that is being phased out in 2017.

Speaking to reporters in Whitehall yesterday, Ed Davey, Secretary of State for Energy and Climate Change, expressed confidence the strike prices on offer would deliver the new infrastructure required to keep the lights on and meet the UK's renewable energy targets.

"We believe after a huge amount of work... that these numbers are really strong and they will give the incentive to bring on the energy that we need," he said. "We'll see a supply chain benefit and there will be a consumer benefit. We can see these draft strike prices will get investors to start announcing their projects."

The industry particularly welcomed the government commitment to consider offering additional support for projects located on Scottish Islands, where there is often a strong wave, tidal or wind resource.

"Lack of grid connections to the Scottish islands means there will be minimal wave energy deployment by 2017 and the additional commitment by the UK Government to consult on a solution to this long-standing problem is very heartening," said Martin McAdam, chief executive of Aquamarine Power.

Alongside the strike prices, DECC published data on how much capacity it expects each technology to deploy under the CfD regime between 2014 and 2020.

The figures show that in total, CfDs could deliver 24.9GW to 39.4GW of total new renewables capacity, depending to a large extent on the pace at which the cost of renewables technologies continues to fall. The mid range point of these projections falls slightly below the 38GW that the Committee on Climate Change (CCC) has said would be needed to keep the UK on track to meet its carbon budgets.

Dustin Benton, senior policy advisor at think tank Green Alliance, toldBusinessGreen that he believed the government had three options to "square the circle" with the CCC's expectations. First, it could reduce emissions further from heat and transport, second it could curb energy demand even more than planned, and lastly it could rely on imports of renewable energy. This final option is being considered by the UK, as it seeks to take wind power from Irish wind farms.

Industry insiders hailed the announcement of the draft strike prices as a "step in the right direction", and there were no initial public complaints yesterday about the proposed level of support. 

However, experts warned that with only scant details on the nature of the contracts released ahead of the full Electricty Market Reform draft delivery plan next month it was too early to tell if the new CfD prices really do match the current ROC regime.

Taken on face value, the strike prices on offer appear pretty attractive to investors. For example, both the government and offshore wind industry are working to ensure the levelised cost for energy from offshore wind farms is no more than £100/MWh by 2020. But the draft strike prices show offshore wind would receive £135/MWh in 2019, suggesting the government could offer the sector a bit more leeway than some had feared.

But speaking to BusinessGreen, Gordon Edge, policy director for RenewableUK, said the difference in contract lengths made it difficult to compare the investment returns on offer under the CfD and ROC schemes.

While projects supported by ROCs receive payments for the full 20-year lifetime of the projects, CfD supported projects will only receive 15 years of payments, meaning the CfDs will naturally appear higher than ROCs in order to deliver the same returns.