Cornwall has been publishing Roc forecasts for several years, producing both within-year and forward forecasts. Through on-going monitoring of renewables roll-out, Roc production, meteorological conditions and system demand, we have built up an excellent track record of calling the market.
With the Renewables Obligation set to close to new capacity after March 2017, we look at the current state of the market and what to expect following its imminent closure.
Shaun of the Dead: An Oversupplied Market
At the beginning of Compliance Period (CP) 15 (2016-17) the Roc market, systematically engineered to be short and create demand for certificates, looked at risk of being long for a fourth consecutive CP.
The first CP of which stems back to 2013-14 (CP12), the first year Ofgem issued more Rocs than the supplier obligation (62.9mn against 61.9mn respectively). This resulted in 2.6mn Rocs being banked into the next compliance period (CP13), and like a set a dominos, caused a further 2.6mn Rocs to eventually be banked into CP14. But it was CP14 that saw the greatest level of distortion, with meteorological conditions exacerbating the glut and creating an estimated oversupply of 8.8mn Rocs.
Hot Fuzz: Changing Winds
Yes, even with an estimated 8.8mn Rocs banked from CP14, we are expecting an undersupplied market in CP15. Meteorological conditions have played a major role in this swing, with the wind flexing its power over renewables production in the UK. According to government statistics, wind output in the first nine months of CP15 has been more than 11% lower than the equivalent period of CP14. To exacerbate a reversal in market trends, hydro output has been down 28% and bioenergy down 11%.
Consequently, we now expect a “recycle” to be achieved in CP15, increasing the value of Rocs to green generators. A recycle value––a £/Roc reward paid to suppliers––is only achieved if compliance is below 100%. But this will only be known at the point which suppliers are required to “redeem” their obligation, which takes place five months after the end of the compliance year in September.
Indeed, Rocs in the February 2017 NFPA e-ROC auction traded above the buy-out price for the first time since December 2013. But will this continue beyond the current CP?
The Department of Business, Energy and Industrial Strategy (BEIS) have set ambitious targets for CP16 to help restore market conditions, uplifting the RO on suppliers by 17.5%. Cornwall’s latest Roc forecasts expect this to create even greater levels of undersupply next year, and hence further increase Roc values. But with higher targets comes higher costs, with the RO expected to represent nearly £60 on a typical domestic customer’s annual electricity bill in 2017-18.
The World’s End: RO Closing to New Capacity
Yes, the Renewables Obligation, which began in 2002 and has been the largest renewables support scheme in the UK to date, is set to close to new capacity after 31 March 2017. But does this mean we won’t see any more renewables built? And have RO costs on consumer bills reached their maximum?
Well, even though the RO is closing to new capacity after March, projects can still accredit through grace periods. In fact, depending on technology type and eligibility, new projects can apply for grace periods out to March 2019. This means that the RO on suppliers, and hence costs on consumer bills, will rise for years to come.
Furthermore, government’s intention to exempt energy intensive industries from the costs of the RO and Feed-in Tariff (FiT) schemes will likely result in an additional spike on consumer bills.
However, with no future guaranteed beyond March 2019 for the now capped FiT scheme, the Contracts for Difference (CfD) scheme will soon become the only pathway to building renewables. Among the technologies hardest hit will be solar, with all grace periods for PV under the RO ending on 31 March 2017, and no CfD round planned for it as an established technology.
In terms of renewables, the market will closely watch how much capacity accredits under the RO through grace periods, but will also turn to the next CfD auction, which we expect to occur this coming summer.
Cornwall’s Roc Forecasts
Cornwall produces two Roc forecasting services, including our Monthly Within-year Roc Market Forecast and our Long-term Roc Market Forecast. For more detail contact Tim Dixon on 01603 959881 or T.Dixon@cornwall-insight.com.