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Low-carbon levy costs to peak later than government expects

Dan Starman Dan Starman Senior Consultant
18th April 2018

Cornwall Insight's new paper - Static Electricity: New Controls for Low Carbon Levies - has found that despite the efforts to control the costs of supporting low-carbon deployment, a continued overspend is locked in well into the next decade.

Alongside the 2017 Autumn Budget the government issued details of a new Control for Low Carbon Levies which outlined a spending envelope for renewables schemes (the Renewable Obligation (RO), Feed-in Tariff (FiT) and Contracts-for-Difference (CfD)) to 2024-25. At the same time, it was announced that there would be no further subsidy for renewables until costs were forecast to fall in aggregate or where they have a net reduction effect on energy bills.

BEIS forecasts this peak will occur in 2023-24 at £10.2bn (in 2017-18 money). However, our latest insight paper shows the government’s decision to publish a forecast of costs to 2024-25 fails to show the longer-term profile, where our modelling suggests the potential for costs in excess of £12bn/ year in 2026-27. This is driven by the commissioning of the Hinkley Point C nuclear power station and assumed commissioning of offshore windfarms.

Cornwall Insight Senior Consultant Dan Starman commented: “it is unlikely that further subsidy support for low-carbon generation will be a viable political option in the long term, at least if the current weighting of priorities towards measuring and managing costs remains in ascendancy in the future and the government of the day still wishes to only offer new support to the extent overall levy costs have fallen below the planned 2025 level.”

Other insights from the paper include that

  • The £557mn pledged for future CfD rounds is sufficient to procure around 8GW of the circa 10GW of offshore wind in development
  • The level of future low-carbon levy costs is highly influenced by shifts in wholesale prices. For example, a reduction of £5/MWh in the Intermittent Market Reference Price would have the impact of increasing annual CfD support for a 900MW offshore wind farm by at least £13.5mn
  • The subsidy focus on and success of offshore wind has the potential to drive significant wholesale price cannibalisation in the day-ahead market during windy conditions. Subsequent reductions in power prices would lead to higher subsidy support costs than BEIS has forecast under the CfD. Our modelling suggests this sensitivity will increase when strike prices are closer to the market reference price, creating a positive feedback loop of anchored costs post-2025

Register here to receive the paper.

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Our Third Party Charges Forecast provides annual five year forecasts of:

  • Electricity, including Transmission Network Use of System, Distribution Network Use of System, Balancing Services Use of System, AAHEDC, Renewables Obligation, Feed-in Tariff, Contracts-for-Difference, Capacity Market, Climate Change Levy, Domestic efficiency schemes (ECO/ WHD/ FPO), Smart DCC costs
  • Gas, including National Transmission System exit charges, Local Distribution Zone charges, Climate Change Levy, Domestic efficiency schemes (ECO/ WHD/ FPO), Smart DCC costs

The report summarises the main changes and methodology, including drivers for key movements. Cornwall Insight provides a supplementary spreadsheet outlining the costs in a p/kWh and £/year format.

To find out more, contact Dan Starman on 01603 604400 or email enquiries@cornwall-insight.com.

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