Consumers could save billions from reformed CfD process

  • offshore wind

    DECC's current stance to focus on offshore wind is costing households money off their bills according to the new report from Drax.

The government could save consumers over £2 billion from their energy bills if it opened future CfD auctions to a wider range of renewables technologies instead of current plans to focus on offshore wind, according to a new report from Drax.

The energy company commissioned NERA Economic Consulting and Imperial College to identify the impact of hidden costs associated with system integration that are not reflected in the contracts government awards for renewable generation.

The report suggests that the intermittent nature of offshore wind production increases costs to consumers by needing other forms of power generation to meet changing electricity demand. Drax’s report suggest these additional costs – known as system integration costs, or SICs – are not currently factored in to the true costs of renewables.

These include maintaining sufficient levels of backup capacity for reliability and managing flows on the transmission network to balance the system.

The Department of Energy and Climate Change uses the levelised cost of energy during CfDs, whereas the report claims this needs to be added to the SICs for any given technology to get the true whole system costs.

The UK government recently confirmed that the remaining three CfD auctions in the current Parliament would be focused on ‘pot two’ technologies, particularly offshore wind. The findings point out that with SICs added to the current expected strike price for offshore wind, the technology could require a CfD of £127 per MWh, with solar at £96 per MWh.

With the new support levels modelled in over planned energy auctions, the report claims the new energy mix that could win contracts is shown to save consumers £1.9-£2.2 billion over a 15-year period. This support is already paid for through energy bills and the new cost-efficient mix would lessen the impact.

Dorothy Thompson, chief executive of Drax Group, said: “This independent research shows it’s crucial we get the right mix of energy generation. Intermittent renewables like wind and solar are vital as we continue to clean up energy generation, but they need to be backed up by a constant supply of electricity that can be flexed up and down to make sure the UK’s businesses and households always have power on demand.”

The report suggests two possible policy changes to enable these savings to be made. The first would allow CfD projects to bid into the capacity market, enabling them to receive credit for backing up the system. This option would also modify CfDs so that all technologies use the same market reference price to better reflect the actual value of output.

The second would enable the auction administrator to rank new renewable projects in order of their whole system costs, with the cheapest having priority.

Drax’s report claims both these options would result in more efficient investment and deliver renewable generation at lower cost than the current approach.  

The findings could put further pressure on DECC to rethink its stance on CfDs after energy secretary Amber Rudd recently confirmed there were no plans for large-scale solar projects to be included. The department has defended recent policy moves away from subsidy for solar by citing its desire to keep consumer energy bills as low as possible.

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