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Government seeks views on making it easier for smaller companies to access electricity market

The Government is seeking views on how it can reduce the barriers to entry in the electricity market for smaller renewable energy generators following reports that these companies are finding it harder to obtain guarantees that companies will purchase their power.09 Jul 2012

It has published a call for evidence (20-page / 140KB PDF) on what can be done to make it easier for these companies to obtain power purchase agreements (PPAs) on competitive terms. It plans to incorporate responses into the draft Energy Bill.

A "diverse electricity market, with reduced barriers for new entrants" is one of the stated aims of the Government's radical package of electricity market reforms (EMR), intended to encouraging low carbon generation while increasing security of supply. The Government has said £110 billion worth of investment in low-carbon forms of power generation will be needed over the next decade.

"Whilst the ['Big Six'] large vertically integrated energy companies will be an important source of continued investment, they may not be able or be best placed to invest at the scale and speed that is needed to meet the challenges ahead," the Government said in the document. "In the last few years independent developers have played an important role in delivering new capacity in the renewable and gas generation sectors and could play a key role in meeting the Government's goals and deliver essential investment in the future, provided market conditions are right."

A previous call for evidence, which considered whether similar issues could affect independent investors in the gas generation market, closed at the end of last month.

However energy law expert Simon Hobday of Pinsent Masons, the law firm behind Out-Law.com, questioned why the Government had not sought views on this area sooner.

"It is good to see that the Government is looking at the difficulties being faced by independent operators to obtaining PPAs, and trying to address potential barriers to market access," he said. "However, given the length of time that the electricity market reforms have been under consideration, one might have expected that this - as with the recent call for evidence on the role of gas in the electricity market - would have been considered earlier in the market design process."

Hobday had commented in May, when the Energy Bill was published, that little was "set in stone" with much of the detail needed to flesh out the changes having being promised in the form of secondary legislation to be published later this year or next.

Independent electricity generators typically rely on long-term PPAs in order to secure the finance they need to invest in generation technologies. A PPA allows the generator to offset some of the risks of the project onto a counterparty, who will in exchange be able to take advantage of a cheaper guaranteed price for electricity. However anecdotal evidence shows a "deterioration" in the terms available to generators seeking to set up PPAs, the Government said, with the risk of an "investment hiatus" if action is not taken. In addition, some developers had expressed concern that the new feed-in tariffs with contracts for difference (FiT CfDs) proposed under the draft Bill will "further constrain" their ability to secure PPAs, it said.

The paper sets out various options for consideration, including market-led initiatives as well as possible competition and regulatory measures. These could include obligations for large suppliers to offer PPAs to renewable developers that ask, on commercial terms, or establishing an "off-taker of last resort' which is obliged to offer standard terms priced above what would reasonably be expected from a commercial bidding process. Alternatively the industry could develop codes of practice on pricing transparency and market participation, as well as sets of standard terms.

However, the paper stressed that the Government would only intervene if it could do so in a way that was "proportionate, targeted and ... [delivers] benefits that outweigh the costs".

The proposed FiT CfDs will offer producers of low carbon power a fixed price for energy supplied to the National Grid. They will be set up between energy providers and the National Grid, acting as an independent 'system operator', with payments made by reference to a technology-dependent 'strike price' and a market reference price. The payments are intended to replace existing subsidies and incentives such as the Renewables Obligation, and will also protect consumers by "clawing back" money from generators if the market price is higher than the strike price.