Renewable Electricity Auctions in the UK—The Costs of Excluding Onshore Wind and Potential Savings from Merging Technology Pots

04 November 2015

London, UK – The consumer group Citizens Advice has commissioned NERA Economic Consulting to assess the impact on consumers of the British government’s policy decisions on auctions for renewable electricity subsidy. NERA’s report is published today alongside the Citizens Advice report, “Generating Value? A Consumer-Friendly Electricity Generation Policy.”

NERA Associate Director Daniel Radov and Senior Vice President Richard Marsden led a team of experts including Senior Consultants Alon Carmel and George Anstey, and Economic Analysts Sam Forrest, Konrad Borkowski, and Dr. Clemens Koenig, which modelled the impact of potential government decisions on the Contract for Difference (CfD) auctions and on the costs that consumers would pay.

The UK government introduced auctions for setting subsidy levels for renewable electricity projects under the CfD mechanism in 2014. The first auctions in February 2015 resulted in prices significantly below the maximum strike prices, showing the potential of auctions to drive cost savings for consumers.

The UK government has now proposed to stop subsidising new onshore wind projects. As onshore wind is one of the cheapest forms of renewable electricity, this may lead to higher costs for consumers if the government is still to meet the renewable energy target in 2020. NERA’s analysis found that cutting funding for onshore wind projects would increase the total cost to consumers by around £0.5 billion (over the lifetime of the contracts, and not discounted for the time-value of money).

Further, consumers could save significant amounts if the government modified the auction system to require all technologies to compete against each other for subsidy. Currently, the auctions for subsidy under the CfD support scheme are split into different technology “pots” to protect the higher cost and less-established technologies such as offshore wind from competing with lower-cost technologies like onshore wind and solar PV. NERA’s analysis suggests that if technology Pots 1 and 2 under the CfD were merged and the technologies were required to compete with one another, consumers could save around £1 billion, as lower-cost technologies like onshore wind and solar would replace more expensive technologies like offshore wind.

NERA’s model of the GB Renewables Auctions can be used to analyse policy decisions, bidding strategies, and the impact of auction outcome uncertainty on project valuations. NERA’s team of auctions and renewable energy experts developed the model, which has been calibrated to the outcome of the first auction in February 2015.  

Notes for editors:

Auctions for setting the level of subsidy for renewable electricity were introduced in GB in 2015. The renewable subsidy is paid to winners of the auction who receive a contract with the Low Carbon Contracts Company (LCCC). The contract takes the form of a Contract for Difference whereby the LCCC pays the electricity generator a top-up above the wholesale electricity price. The level of this top-up is determined by the difference between the wholesale price and the strike price in the generator’s contract. The cost of this top-up payment is then passed on to consumers through an obligation on electricity suppliers.

The cost numbers quoted are the costs paid by consumers over the term of the CfD contracts (15 years for most technologies). As noted above, the costs are cumulative and undiscounted.

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