Posted on: 26/09/2023
Following on from our popular Generator Revenue Streams webinar last week, James Clark, Business Development Manager, and our webinar host, takes a look at the key headlines of the webinar and discusses AR5 CfD results.
Wholesale power price movements
Power prices over the last six months have been on a downward trend with high volatility. Bearish supply signals have occurred due to the healthy European gas storage during the summer, avoiding the typical risk premia associated with the upcoming winter. However, demand in Europe has fallen below seasonal norms, primarily due to the energy crisis causing demand destruction.
Despite overall stability in gas supplies and storage levels, price fluctuations have occurred whenever there are discussions of potential strike actions at critical gas and LNG supply sites. Over the past six months, Power Purchase Agreement (PPA) activity has remained lower than usual, as electricity generators take advantage of the higher power prices from the previous year.
The capture prices of solar and wind energy have experienced significant fluctuations since the beginning of the year. Solar energy capture prices were heavily influenced by the energy crisis. In Winter-22, a negative capture price of -5.06% was observed. In Summer-23 this discount has increased to -8.78%, which largely reflects a normalisation of Peak power prices.
Wind generation face challenges due to its intermittent nature. In Winter-22, capture discounts dropped to -12.84%. However, in Summer-23, they settled at -6.6%, showing signs of improvement but highlighting the volatility that power price and wind speeds have on this sector.
Low carbon subsidies
The Renewable Obligation Certificate (ROC) market has witnessed developments recently as buyout prices have increased reaching a nominal value of £60.21 per ROC for CP22. Recycle value for CP21 is estimated at £6.79 per ROC which results in total nominal value of £59.67 per ROC. Further, we have seen an increase in the CP21 buyout prices moving from £52.88 to £59.01. However, due to the high interest rate environment we are observing less banking of ROCs.
Meanwhile, DESNZ has taken a step in initiating a call for evidence on the potential introduction of a Fixed Price ROC scheme which is scheduled to take effect in 2027. The deadline for this call for evidence is set for the 9th of October. The government is seeking views on two proposed models: one that involves a centralised counterparty, similar to the Low Carbon Contracts Company (LCCC), to pay generators, and another that retains tradable certificates and redemption windows. Additionally, they are seeking opinions on the possibility of delaying implementation until the 2030s and changing the inflation indexation from RPI to CPI. Looking ahead, DESNZ is expected to release a 'minded to' position on this scheme in early 2024, which will undergo further consultation. Legislation for the scheme is expected to occur in 2025, providing stakeholders with only a two-year advance notice period.
In the past 6 months front CP REGO prices have been steadily on the rise. The increased prices can be attributed to several factors, including: the elimination of GoOs, increased demand across various consumer categories such as industrial and commercial, small and medium-sized enterprises, and domestic sectors.
However, when we look further into the future prices for REGO are considerably lower due to the anticipated increase in offshore wind production volume.
The DESNEZ has recently released the parameters for next year's T-1 and T-4 Capacity Market auctions. The T-1 auction for Winter-24 has a target capacity of 7.4GW, indicating a focus on securing a stable supply in the near term. In contrast, the T-4 auction for Winter-27 sets a target capacity of 43GW. These targets highlight the importance of planning and investment in ensuring energy reliability and security.
Contracts for Difference
On Friday 8th September 2023 the government released the results of the fifth round Contracts for Difference (CfD) auction. 3.7GW of renewable capacity spread across 95 projects received contracts. In comparison to AR4 where we saw 10.8GW there has been a significant reduction of contracts.
What stands out and has been a topic of many conversations has been the lack of offshore wind capacity secured in this auction. The administrative strike price that was set for offshore wind stood at £44/MWh, which was a small reduction from the prior year’s auction. In addition, generators have voiced concerns about a 40% increase in their capital expenditure (CapEx) costs over the past year due to various factors associated with turbine construction.
On a more positive note, a total of 56 contracts were granted for solar projects, alongside 24 contracts for onshore wind initiatives. There is also a Geothermal technology which was awarded a total of 3 contracts with a capacity of 12MW.
In comparison to AR4, AR5 has presented more discouraging results. The focus now shifts to the government's response, as no significant reforms are expected in the scheme structure for AR6, although potential changes might be considered for AR7.
If you were successful in the latest CfD AR5 auction round and are looking to secure a PPA contract, please contact us to find out more about the long-term PPAs we offer that align with the commercial terms of your CfD commitment, providing new build projects with a viable route to market and a bankable PPA partner.