Posted on: 10/02/2022
Mark Cox, Strategic Account Manager, James Clark, Business Development Manager and Alex Walmsley, Senior Pricing Analyst, provide their expertise in our latest SmartestEnergy Talks podcast. They discuss the volatile wholesale price movements and rising environmental and network costs forecasted for I&C businesses and the value opportunities available for generators.
Extraordinary Power Price Volatility
One of the key topics discussed in both webinars was the wholesale market. Rising energy prices are now very much mainstream headline news, and with such extreme market conditions, this has affected several different Non-Commodity Costs on a typical I&C business energy bill.
Wholesale prices were initially reasonably steady with Winter-21 forward seasonal contracts at £50/MWH, however, as we reached summer, prices began to lift, hitting record highs in December last year at under £300/MWh. Unfortunately, the energy crisis has affected everyone and will affect our I&C customers with the wholesale and non-commodity portions of a typical energy bill on the rise. However, on the other hand, with prices unrecognisable against the same period last year, this has benefitted generators, particularly those on flexible PPA contracts, who have been able to utilise this volatility.
RO, ROCs and CfD
In the podcast, Mark covers low carbon subsidies. He explains the Renewables Obligation (RO), the original subsidy scheme, starting in 2002 that has been a real driving force behind renewable power over the last 20 years. The RO scheme is now closed to new entrants, replaced by the Contracts for Difference (CfD) scheme.
Our forecasts, extending out to 2024/25, see the prices jump by around 7% from 2022/23, driven by much higher inflation expectations. The scheme is index-linked to the RPI (Retail Prices Index) of the previous calendar year, which we expect to hit 7% in 2022 before easing to around 5% in 2023, which will have a compounding effect on future years.
On the generator side, James covered ROC's, where we can see the buyout value is increasing in line with inflation, and High, Central and Low cases are mirroring this, with the High-Low spread increasing into further compliance Periods. We expect CP20 Buyout to out-turn at £52.85/ROC, with RPI throughout 2022 exceeding 7% before falling in 2023 closer to 5%.
Alex covered CfD's and the upcoming allocation round 4, which is currently in the preliminary stages. The structure of this auction is different to previous ones, with the technology allocation split into 3 pots:
- Established Technologies
- New Technologies
- A dedicated pot for Offshore Wind.
The auction has been launched as the government's most ambitious allocation round to date with annual funding of £285m split across the three pots, and, theoretically, 12GW of new capacity could be awarded. We expect the results to be announced in late Spring/early Summer.
Listen to the podcast here for a more in-depth discussion into our Non-Commodity Cost and Generator Revenue Streams webinars, including further information on the current energy crisis, detail on System and Day-Ahead Prices, and more information on the various low-carbon subsidies.