Changes in Hurdle Rates for Low Carbon Generation Technologies due to the Shift from the UK Renewables Obligation to a Contracts for Difference Regime

Mon Dec 09 15:24:00 EST 2013
By Dr. Richard Hern, Daniel Radov, et al.

This study conducted by NERA for the UK Department of Energy and Climate Change (DECC) assesses the impact of the UK's planned changes to renewable electricity support policy on investors’ cost of capital, a key component in the determination of the level of subsidy through the "strike price." Led by NERA Director Dr. Richard Hern, Associate Director Daniel Radov, and former Associate Director Dr. Mauricio Bermudez-Neubauer, NERA experts set out how the risks facing investors will change as a result of the planned shift from the existing tradable certificate system (the “Renewables Obligation”) to a price-based support system ("Feed-in tariffs with contracts for difference"). The report was published by DECC alongside the UK government’s Electricity Market Reform Delivery Plan, and follows the government’s publication of final strike prices earlier this month.

NERA's report, "Changes in Hurdle Rates for Low Carbon Generation Technologies due to the Shift from the UK Renewables Obligation to a Contracts for Difference Regime," considers in detail the change in risks associated with the planned transition to a system under which renewable and low-carbon electricity producers enter into a contract to produce electricity at a pre-agreed strike price. The new system based on Contracts for Difference (CfDs) is intended to guarantee low-carbon generators a stable revenue stream, with the aim of bringing down the cost of capital.