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UK: Call for Evidence on Enabling a High Renewable, Net Zero Electricity System

  • United Kingdom
  • Energy and infrastructure - Clean energy

30-07-2021

On 26 July 2021 the Department for Business, Energy & Industrial Strategy (“BEIS”) published a response (“Response”) to its Call for Evidence on Enabling a High Renewable, Net Zero Electricity System (the “Call for Evidence”) (see our previous briefing).

Simon Davies, Principal Associate comments: “Unsurprisingly, this response highlights the importance of the CfD in order to maintain growth in UK renewable deployment. Whilst some regulatory changes will be consulted on ahead of AR5, it is likely that the CfD will be maintained as the principal support mechanism for low carbon generation projects in the medium term, as this provides much needed investment certainty and regulatory continuity in the context of net-zero and investor concerns about price cannibalisation. In the longer term, it will be interesting to see if the industry’s concerns about the suitability of current wholesale market design will be addressed with a more holistic review of our energy market which addresses price stability (or floor), incentives flexibility and better serves the needs of a co-ordinated offshore network.”

We have summarised below some key aspects of the Response.

Importance of the CfD and challenges with alternative routes to market

The Response highlights the challenges that developers face with increasingly common alternative routes to market outside of the contract for difference (CfD), e.g. corporate purchase power agreements, utility purchase power agreements, trading in the wholesale market and/or participation in the capacity market or other balancing services (note that a separate Capacity Market Call for Evidence has been published alongside the response). Many respondents consider that the current wholesale market design based on short-run marginal costs is not a sufficient route to market for project financing purposes and are concerned that increased levels of renewable deployment on the system will cause a decrease in wholesale electricity prices and an increase in price volatility.

Ensuring renewables meets the needs of the system

The Response holistically explores how whole system costs of renewable deployment could be minimised, particularly focusing on striking the balance between price stability, exposure to demand signals and locational signals and the role of renewables in providing system services.

A range of options were provided as to how variable renewable generators could change their operating or investment behaviour to respond to wholesale price signals, including greater investment in storage. Most respondents agreed that generators should account for flexibility and be alive to wider system impacts, but that this should be achieved via greater incentives and removal of barriers to participate in balancing services, rather than mandatory requirements.

Innovative technologies and business models

A number of responses recognised that renewable projects co-located with low-carbon flexible assets can provide a number of benefits, including optimisation of the use of grid connections and infrastructure and the potential to provide additional system services. However, it was questioned whether incentives for such co-location should primarily sit within the CfD, which is focussed on supporting renewable generation capacity, rather than through the capacity market or balancing market, which are focussed on capacity and trading and balancing but agnostic as to whether power is renewable or not.

Some interesting responses were also highlighted in relation to the changes to the CfD that might be required to facilitate the coordination of offshore energy infrastructure, for example allowing joint bids, increased flexibility in CfD milestones to recognise increased risk of delays/timing misalignment in projects sharing infrastructure, and changes to eligibility criteria. It will be interesting to see whether any of these proposals are taken forward in light of the workstreams being progressed under the Offshore Transmission Network Review (OTNR).

Other options which were examined in the context of potential CfD developments included projects with assets in different locations, hybrid offshore wind interconnector projects, international renewable projects, part-built projects and extensions/repowered projects.

Next steps 

The Call for Evidence has highlighted the need for both short-term incremental improvements and longer-term holistic change. Short term changes will be focussed around the design of future allocation rounds (from AR5) for the CfD and how to strike the right balance between supporting investment in new projects, while exposing projects to the right market signals to drive efficient behaviour. Further consultation will be undertaken on any such policy changes.

Any longer-term changes will need to be considered holistically as part of a wider approach to the electricity market, taking into account net zero and the recent sixth carbon budget announcement.