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Flooring it – accelerating decarbonisation through CfDs

Cornwall Insight wrote to Energy and Clean Growth Minister Claire Perry on 10 January to offer an investable solution that will help keep the UK on track to meet steepening decarbonisation goals. National Grid’s Two Degrees scenario shows a 107GW gap between the 53GWs of low-carbon capacity that we have today and the 160GWs that may be required in 2050. A lot of the built generation will also require repowering. The investment challenge is immense. Significant falls have been seen in the costs of onshore renewables technologies such as solar and onshore wind. Policy maker modelling may show that long-term wholesale power revenues over the life of such assets could deliver a positive return on investment. However, project funding from banks and other risk-averse investors still requires insulation against short-term swings in wholesale power prices. In arguing that renewable projects can be built on a “merchant basis” there is a gap between economic theory and investment practice. Our Contracts for Difference (CfD) Floor model is based on a simple premise. The generator will receive protection against wholesale reference prices below a guaranteed floor price (in £/MWh), and would only be able to realise upside in power prices above the floor price to the extent any sums received under the floor had been fully repaid first. This offers lower strike prices, a lower risk of subsidy, would attract low cost of capital investors and could be delivered with no material change to the fundamental CfD structure. Read the ...

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