Contracts for Difference: Concerns persist for SMEs and new entrants in power sector

CfD "three dimensional chess" may damage SMEs attempting to break open energy market Solar power particularly disadvantaged

Secondary legislation for the new Contracts for Difference (CfD) scheme for renewable electricity will be debated in the House of Lords tomorrow. CfD support for renewable electricity has just today been granted State Aid approval by the European Commission [1].

CfDs are due to be in operation from this autumn and will replace the existing major support scheme for renewable electricity, the Renewables Obligation (RO), from 2017. However, DECC is currently proposing to exclude large solar power projects (over 5MW) from RO support entirely from next year, leaving much of the solar industry dependent on the unknown CfD mechanism.

Legislation is passing through Parliament before it is actually clear how CfDs will work and what budget will be made available for the Government's flagship energy policy. Government hopes to finalise all the legislation by the end of the month, ready for the first round of CfD auctions this October.

The REA and STA have raised their ongoing concerns with Lords spokespeople about the potential for CfDs to exclude smaller participants to the benefit of large incumbent players. Concerns persist that DECC is not taking sufficient care to safeguard smaller players and new entrants into the renewable power market.

Over 30 consultations relating to Electricity Market Reform (EMR – the policy package introducing CfDs) have been issued since last summer, overwhelming smaller players. In engaging with Government and stakeholders, both the REA and STA have consistently made clear the need to ensure that the new policies work to support SMEs, which are vital for diversifying the UK's consolidated power markets. SMEs dominate the solar industry, but are also important in all renewables, such as advanced waste conversion and biomass CHP.

Key concerns are:

*The frequency of auctioning. Only conducting auctions once per annum as proposed risks leaving unsuccessful SMEs with no income stream and facing the risk of closure. To safeguard jobs in green SMEs, allocation rounds should operate on a quarterly basis.

*Qualification criteria. Onerous requirements ahead of bidding particularly disadvantage SMEs. Grid requirements in particular need clarifying.

*Technology minima are needed for all technologies to provide greater industry confidence and to minimise the risk of boom and bust across technology sectors, as happened under a previous support scheme, the Non-Fossil Fuel Obligation (NFFO).

*Delayed access to Off-taker of Last Resort (OLR) support. SMEs face greater difficulties selling their power into the market than vertically integrated power companies, yet support is not expected to be ready to access until 2016. Access to OLR support should be made available from spring 2015 at the latest.

*Small budget allocation – the NAO estimate just £29 million will be available for all technologies for the 2015/16 CfD allocations. It is important to ensure that the most cost-effective technologies are given sufficient budget in order to minimise costs to consumers.

REA Head of Policy Paul Thompson said:

"It is vital that the most cost-effective sectors – biomass, solar, onshore wind and established waste to energy technologies – are given sufficient budget to minimise short-term costs for consumers.

"At the same time, CfDs must also foster those early stage technologies – geothermal, wave and tidal and advanced waste conversion – that will come down in cost as they mature, delivering low carbon energy security long into the future."

STA Head of External Affairs Leonie Greene said:

"The sheer complexity of the new policy mechanism disadvantages SMEs who are entering a game of three dimensional chess against multi-national utilities. DECC needs to do more, and quickly, to level the playing field for SMEs.

"In particular, DECC should not restrict RO support for solar power – it is unfair that the solar industry is being uniquely exposed to the untried and unclear CfD mechanism without the benefit of a transition period from existing, trusted policies. The solar industry was on an impressive track to zero subsidy, but the Government needs to provide a level playing field and stable policy if this is to be achieved."

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