Posted on: 23/02/2016
Subsidy reductions and falling wholesale electricity prices have reduced the returns on many renewable projects. Although generators will have seen their income drop, Iain Robertson explains that some better news may be on the horizon.
Business consumers may be enjoying the benefits of relatively weak wholesale energy markets but they could be in for something of a surprise as 2016 progresses.
The steep reduction seen in electricity prices - from £55/MWh two years ago to closer to £35/MWh today – is masking the continuing sharp rise in non-energy charges which now make up almost half of business energy bills.
Despite weak electricity markets persisting, analysis by SmartestEnergy for our latest Informer Series webinar suggests overall business energy bills will rise by 3 per cent this year.
While the rises being seen in non-energy charges continue to be a cause for concern for energy consumers, the flip side is that some of the increases will benefit embedded generators.
That will come as welcome news given the impact that reductions in wholesale prices have had on returns for many projects. For some which fall under the Small Scale FiT scheme for example, lower wholesale prices have made the new export tariff available now start to look like a more attractive option than selling via a Power Purchase Agreement (PPA).
However, it’s important for generators to consider their individual circumstances carefully before taking a decision as the headline pence per kWh figure isn’t the whole story. The more frequent payments and additional benefits available under PPAs must be understood, and given the policy upheaval the sector has seen over the past 12 months, there is always the possibility that export tariffs may change at some stage.
While the fall in wholesale prices has meant for challenging times for generators, they should benefit from the rises forecast in some non-energy charges.
The looming closure of the Longannet power station in Scotland this Spring for example will have a significant impact on Transmission Network Use of System (TNUoS) charges.
The change in the balance of demand and supply on the system should be good news for projects where the Triad benefit makes an important contribution to annual income. Looking further ahead, a reduction in peak UK power demand due to factors such as greater use of energy efficiency measures should see increasing costs being recovered from smaller demand which should drive further rises in Triad benefit for generators.
The underlying trend in Balancing Service Use of System (BSUoS) charges which most generators benefit from is also on the rise, partly due to the increase in contracted Supplemental Balancing Reserve (SBR) capacity. And from next winter onwards, generators may be able to take advantage of a new revenue stream, less time-specific than Triad benefit, from the introduction of the Capacity Market, although this will depend on whether their PPA providers have sizeable retail businesses or not.
To hear about some of these changes and what they could mean for your generation projects in more detail, watch the webinar here.