RWE npower analysis shows that Contracts for Difference and Capacity Mechanism elements of Electricity Market Reform may add between £10 and £25 per MWh to cost of wholesale electricity by 2020
UPDATED on 23 January 2014: Following the closure of the government consultation on Electricity Market Reform (EMR), RWE npower has today issued a report into business sentiment on the policy proposal.
The report reveals new insights into the policy concerns of a number of major energy consumers within the UK, most notably around higher energy costs and their ability to forecast them. The report also presents a comprehensive analysis of the financial impact these measures may have, particularly with regard to two crucial elements of the EMR delivery plan, Contracts for Difference (CfD) and the Capacity Mechanism (CM).
Contracts for Difference (CfD) Key Concerns:
- The danger of volatility being introduced into electricity costs
- The potential lack of sufficient notice of charges, hindering budgeting requirements
- A reduced incentive for generators to enter long-term Power Purchase Agreement (PPA) arrangements
Capacity Mechanism (CM) Key Concerns:
- The impact that the CM will have on the wholesale markets, shifting volatility from commodity to non-commodity costs
- The structure of CM charges could negate any incentive for businesses to participate in Demand Side initiatives, which could be an important way to manage system demand at peak times
Further to this, and based on its own research, RWE npower has calculated that the proposed approach to CfD and CM could end up costing businesses between £10 and £25 per MWh by 2020. RWE npower’s current analysis for the CfD is a net cost of between £7 and £10 per MWh and between £3 and £15 per MWh for the CM. The latter figure will depend on final policy design of the CM, which has not yet been decided.
Wayne Mitchell, Director of Industrial and Commercial Sales and Marketing at RWE npower, commented: “Our roundtable and associated report clearly show that UK businesses still have serious concerns about the implications on future costs and forecasting abilities for their organisations.
“Getting the electricity market right is absolutely essential for the competitiveness of UK businesses. It is therefore crucial to understand from a business context the impact of DECC’s policy proposals around EMR. Whilst there is a strong need for UK investment in energy infrastructure, it has become clear from businesses that EMR may come at the cost of UK plc competitiveness. What’s required is greater certainty for businesses to be able to forecast costs and budget accurately.”
RWE npower has also issued the results of its latest EMR Pulse Survey as part of the report. The Pulse surveys are designed to act as a barometer of business confidence with regards to EMR, with the most recent survey tracking the views of major customers between July and October 2013. Key findings include:
- Businesses are concerned about the impact EMR will have on UK competitiveness in global markets
- There is greater understanding of CfDs, while the CM is less familiar, and the majority would also like to better understand the full impact of the Carbon Price Floor
Commenting on the uncertainty around CfD-related charges, the Head of Energy Supply at a major utilities company, commented: “As a big energy consumer, it is critical that we have the ability to plan ahead. We would like to see greater visibility of charging for CfD costs under EMR, the minimum transparency being that prices are set in the November or December of the preceding year. We appreciate that may not be possible with all the variabilities, but look forward to further consultation with RWE npower and DECC to ensure such options are properly explored.”
The report was drafted to help facilitate discussion with major energy users in industry and enable their views to be captured and incorporated into RWE npower’s official consultation response to DECC. The report is based on an RWE npower roundtable hosted on 14th November 2013. The roundtable was attended by representatives from a wide range of UK-based business, with a combined total volume usage of 10.5TWh; equating to that of just under 3.3million households and accounting for 5% of B2B energy usage in the UK. In addition, Jonathan Mills, Director of Electricity Market Reform at DECC was also in attendance.