Posted on: 01/03/2018
2017 was the greenest year on record and 2018 could top this with even more renewable projects contributing to energy mix. But how are revenues shaping up? Following our recent webinar, Chris Smith, Head of Renewable Sales, discusses the key trends and issues generators need to know for the year ahead.
While the major headlines around renewables are all positive, the financial landscape for independent generators is becoming increasingly challenging.
Revenues for existing projects are being squeezed as embedded benefits are cut and power prices are lower than we were seeing a few years ago. Developers looking to build new projects face these same challenges, plus removal of government subsidies which were crucial for securing finance.
But it’s not all bad news. There is still plenty of movement in the wholesale price to allow active generators to benefit and subsidy-free projects are becoming a reality through co-located storage and corporate Power Purchase Agreements (PPA).
Here is our wrap-up of what’s been happening in the market and what we think the year ahead has in store for generators.
Power prices update
Summer 18 and Winter 18 prices have seen an upward trend, with power prices increasing almost £15/MWh over a two-year period as global commodities prices rise and the UK continues to import more of our gas.
With this in mind, it is more important than ever to have a PPA strategy in place that enables you to act when the market spikes and protects your downside risk.
Within-day volatility continues to have a significant impact on power prices. This winter has seen comparatively low volatility with excess capacity, but the “Beast from the East” this week has caused early afternoon prices to surge past £100/MWh in the intraday markets.
System Sell Prices have ranged from £38/MWh to £295/MWh since yesterday morning and N2EX prices range from £110 - £147/MWh today for peak periods.
Reduction of embedded benefits
Two embedded benefits are to be cut from this April, reducing the additional revenues that generators receive for being directly connected to the distribution network.
The biggest cut is the reduction of the Triad benefit. It was announced back in March 2017 that Ofgem would reduce Triads, meaning the historically high payments generators received for supporting the transmission system during the three Triad periods each winter would be slashed.
Industry parties have attempted to stop this change and a judicial review is still outstanding. A high court injunction had also been raised to delay the implementation of the change until after the judicial review was complete, but this was rejected in January.
The phased approach starting this April will see payments decreased over the next three years, with many generators set to receive nothing after winter 2020.
The second change coming in from April is the removal of the Capacity Market benefit, which some suppliers have been able to pay to generators because their Capacity Market Supplier Charge was reduced by their embedded generation portfolio.
The Supplier Charge will now be charged on a gross basis, therefore removing the benefit for suppliers with embedded generation and the subsequent payments to generators.
SmartestEnergy has been able to pay this benefit to generators but our customers will no longer receive it after this winter.
Future of subsidies
In November last year, the Government announced there would be no new subsidy support until at least 2025 when it expects the cost of current support to start falling.
The Renewables Obligation (RO) scheme was already closed and the Contracts for Difference (CfD) scheme has one more auction scheduled for Spring 2019, but the future of the Feed-in Tariff (FiT) is now very uncertain.
The Electricity Market Reform (EMR) review in 2019 will be the next major opportunity to influence for new support, but even then it may take years to come into effect.
Despite a challenging environment set for 2018, there are still plenty of opportunities for generators, both existing and new.
Next week, I will be publishing another blog looking at how to choose the right PPA to optimise your project revenues, so please keep an eye out for that.
About the author
Chris joined SmartestEnergy’s Renewables team in 2017 from Danish energy trading company Neas Energy. He works with generators to develop solutions to help them maximise returns in a changing environment for renewable projects. Chris began his career in the energy sector in 1996 with Eastern Natural Gas. He went on to work as a Generation Services Senior Business Development Manager at RWE npower, developing PPA solutions for customers. He has also worked on the supply side with industrial and commercial users. His role as Business Development Manager at Neas saw him build its UK PPA and CHP portfolio from market entry. Chris has a BA in Business Studies from De Montfort University, Leicester.