Expanding CfD scheme limits options for REMA

PA Consulting’s Alon Carmel, energy transition expert, shares his thoughts on the UK Government’s plans to shift existing nuclear and renewable generators onto Contracts for Difference (CfDs), and the impact it will have on its Review of Electricity Market Arrangements (REMA) in an article in Utility Week by Adam John.

Sharing his thoughts Alon said: “The short-term intervention they are putting in place certainly limits their options for the REMA long-term wholesale market design. They might say the very immediate problem has been addressed, and take the foot off the accelerator on REMA.

Commenting further he said: “It’s really good that the government has decisively intervened in the energy market because it was a very dangerous situation and there were very serious economic consequences for a very large number of families and households.

“So it’s great that they’ve taken the bull by the horns, but there’s just such a lot of complexities that throws up about how to implement and deliver reforms including interactions with other policies and how the market works.”

Adding that what the government has committed to so far does not necessarily “bind their hands” very much in terms of longer-term design of the wholesale market.

Going on to say: “But the sort of things that have been floated such as saying all renewables obligation generators and nuclear generators should be put on CfD contracts to limit the price that they can get as an alternative to a windfall tax that, by its nature, would have an impact on the options for REMA.

“Continuing with CfD contracts is one of the options in REMA but there are a number of other ways in REMA for incentivising investment in low carbon. So, if you put everybody on CfD contracts, they last for about 15 years, then you’ve already taken one of the decisions that limits your options for a number of other REMA areas.”

Alon remarks that there will be a lot of devil in the detail in how to implement the proposals for expanding CfDs, including whether the scheme is voluntary and how to deal with the fact generators will have sold their power forward meaning they may be locked into contracts for several years.

Concluding: “Maybe it’s not the end of the world if these new CfD contracts get phased in gradually over two or three years – you can dovetail with the existing forward contracts. But that does limit the impact, because the high prices and the crisis is now,”