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Cost-Plus Revenue bill: window-dressing that only defers the day of reckoning

Dr John Constable, Energy Director

The new bill takes baby steps in the right direction but shies away from confronting hard realities.

The government has proposed a “Cost-Plus Revenue Limit” to reduce the burden on the electricity consumer. The proposal is clumsily written, contains typos suggesting last minute revisions, and in its summary refers to the scheme as the “Cost-Plus-Revenue Limit”, which would be a comically different sort of proposal far from the government’s intentions. A sloppily written overview statement suggests that this is a rushed and contentious policy proposal, perhaps not enjoying full civil-service support.

But is it actually bad? Intervening in markets to cap revenues sounds like a recipe for shortages, and in some areas covered by this bill that may well be the case, but the principal targets of this bill are two classes of renewable generator that are undoubtedly making out like the proverbial bandits:

a) non-dispatchable renewable generators (such as offshore wind) that are declining to take up their (we think dishonestly) low CfD bids, and are instead taking the current wholesale price, and

b) other renewable generators in the Renewables Obligation (RO) who are not bound by Power Purchase Agreements are able to take the high wholesale prices in addition to their RO subsidy.

Both issues are outcomes of wretchedly poor renewables policy design, the CfD issue because these are, in spite of their name, not actually binding contracts; and the RO folly because the wholesale prices that obtained when the ROC values were baked in were in the £20-30/MWh level, far from the hundreds per megawatt hour now realisable.

These generators are now receiving a subsidy top-up to incomes that are already well in excess of what was expected. There can be no justification for such a burden on the consumer.

Needless to say, government doesn’t admit to any of this, but instead blames the problem on the market structures that mean that the marginal cost of generation, which is now gas-fired, sets the market price and therefore benefits “cheaper” renewables apparently more expensive. But as we know, renewables are intrinsically expensive, and claims for dramatically falling costs are misrepresentations of the facts.

The low CfD bids do not reflect underlying costs, which is why several offshore wind farms with as yet unimplemented low CfD contracts have decided to defer activation and are, one suspects with a deep sigh of relief, taking the higher prices available on the open market.

Government will attempt to curb the revenues to these companies by forming a reasonable estimate of pre-crisis wholesale market expectations and of the generation costs, and then apply a limit. However, they observe:

The precise mechanics of the temporary Cost-Plus Revenue Limit will be subject to a consultation to be launched shortly. The government has been working closely with industry on the detail of the proposal, ahead of it coming into force from the start of 2023. It will ensure consumers pay a fair price for low carbon energy and has the potential to save billions of pounds for British billpayers, while allowing generators to cover their costs, plus receive an appropriate revenue.

In other words, government has no precise idea how to do this, except to ask the industry itself what would be a reasonable limit, a method that does not seem likely to produce a price favourable to consumers. No one doubts that it is feasible to save householders and businesses billions of pounds, but whether this likely to be realised through this opaque and Byzantine procedure is open to doubt. One wonders whether government believes it either; the words “has the potential” smell of weasels if ever words did.

Reaction to these measures from the renewables industry has been powerfully negative, which is obviously a good opening shot in a tricky negotiation, but a move that also confirms the view that the underlying costs of renewables remain stubbornly high. – Why whinge otherwise? Indeed, the offshore wind industry can’t have it both ways: either their CfDs are genuine, in which case they should be compelled to honour the spirit of their “contracts” and accept lower prices; or they need the higher revenues because their CfD prices are cynical bids to gain market positions (options in effect) and the propaganda about falling costs is revealed for what it is, lies.

If the revenue cap is implemented successfully, and it may not be since we can expect huge push-back from the green lobbyists within and without parliament, then wind farms will now be thinking twice about underbidding in the CfD auctions to gain a market position and generate good PR. There are now obviously risks to such posturing.

That said, the revenue cap is intended to be temporary, and isn’t in any case complete (government admits that generators will be allowed to keep some part of the excess revenue) so they may not be that concerned. The bill is more of a ceremonial tap on the wrist than the flogging that these industries deserve.

We should also note that biomass (by which govt means the tree burning Drax Power station) is likely to be exempt or partially exempt from the revenue limits, doubtless because government is all too aware that by capping revenues in the wholesale markets for despatchable generators they would very probably create shortages of such controllable generation just when they are most acutely needed, thus only shifting costs, plus a premium, on to the Balancing Mechanism making the situation worse not better for consumers.

Lastly, and most disappointingly, there is nothing in this bill to suggest that the Prime Minister and her colleagues are actually prepared to tackle the vast cost of the green levies, as has been rumoured on several occasions. The final paragraph of today’s statement tells us that:
Generators would also continue to receive their existing revenue support or subsidy payments, for example Renewable Obligation Certificates, which will help preserve market stability.

In other words, the Cost-Plus Revenue cap simply aims to return the situation to the pre-crisis levels, which were extremely generous to renewables, and there is no attempt here to cut deep in the £10 billion a year cost of supporting thermodynamically incapable and therefore uneconomic generation such as wind and solar, or of addressing the terrible cost that they impose on system management.

In summary, the Cost-Plus Revenue bill is unambitious window-dressing that defers the day of reckoning once more. It takes baby steps in the right direction but shies away from confronting the realities. The current catastrophe is the result of twenty years of misguided renewables policies, and only a root branch reform of those green policies stands any chance of giving real and longer-term relief to UK consumers.