Suppliers to lower price of renewables as part of government energy crisis package
Published September 9, 2022
Alongside a package of measures to help domestic and business energy consumers, Liz Truss, the new British Prime Minister, has announced plans to negotiate with energy suppliers to bring down the amount they charge for renewable energy. The proposals could reduce energy bills by £6.7-£11.1 billion for non-domestic users.
A newly created Energy Supply Taskforce will work to agree long-term contracts with suppliers of green energy which are lower in price and increase reliability of supply.
The voluntary scheme would work by offering nuclear plants and renewable generators with existing Renewable Obligation (RO) contracts, the chance to secure a longer-term agreement with lower returns in place of selling electricity at wholesale market prices.
Truss also announced measures to support businesses and other non-domestic energy users (including charities and public sector organisations like schools) over the next six months. After this initial period, the Government will provide ongoing support for vulnerable industries. A review in three months will consider where this should be targeted. Business groups have pointed out that the plans are lacking in detail and leave many questions unanswered. Meanwhile, small businesses are facing increases in energy costs of more than 500%.
The scheme to reduce the price of renewables hinges on the creation of contracts structured in a similar way to those provided under the more recent Contracts for Difference (CfD) scheme. CfD contracts offer generators a guaranteed ‘strike’ price. If generators sell power onto the wholesale market when above this price, they return the surplus to consumers. With wholesale prices at record levels, Ofgem predicts that generators with CfD contracts will return £23 to the typical domestic customer this winter.
RO contracts pay a subsidy to generators in addition to the wholesale price. As the wholesale cost of electricity is set by the price of gas, currently at record levels, low carbon generators with RO contracts are also making record profits.
The plan has been hailed by Energy UK as a significant first step to decoupling gas from electricity prices, while giving time for a long-term reform.
However, Dr Nina Skorupska CBE, Chief Executive of the Association for Renewable Energy and Clean Technology (REA), was less enthusiastic: “Our sector is ready to play our part and work with government to urgently design a mechanism that helps reflect the lower generation costs of renewables for businesses and homes. However, I fear that, in a few years’ time, we will look back at today’s announcement with a great deal of regret. It beggars belief that even though the current energy crisis is being caused by the volatile price of fossil fuels, the Government has doubled down on oil and gas production.
“The Government must now focus their plan beyond the winter to help deliver the real solutions to this crisis. A national scale energy efficiency programme, and helping homes and businesses transition to renewable alternatives. Delivering well thought-through wholesale market reforms to decouple electricity prices from the cost of gas. Filling the wide gaps in energy policy, investing in the grid, and offering expanded CfD schemes. Renewables, not more of the same, is the route out of this crisis.”