New Ofgem proposals to replace the renewables obligation

Ofgem response (33 pages, PDF) to a Government consultation on changes to the renewables obligation. The document proposes to link the subsidies provided through the renewables obligation schemes to wholesale electricity market prices, so that total remuneration per unit for renewables power generators would not depend on electricity prices — essentially replicating the financial structure of a feed-in tariff. According to Ofgem, this would reduce the risk borne by these generators. There seems to be no discussion of the effect of the policy uncertainty that adopting and developing Ofgem's (currently fairly vague) proposals might entail.

Ofgem had previously advocated (here and here) other major changes to subsidies for renewables, arguing that the renewables obligation gives unnecessarily high subsidies to some renewable energy projects, at the undue expense of customers. The Government had not adopted these previous suggestions.

Consistency: Ofgem says that “more could be done to reduce consumption of energy within the UK” and “it is disappointing that the [Government's paper] reinforces the message that demand for energy will continue to increase by 1.5% per year”. A few days before this document was published, Ofgem imposed a 1% growth assumption for electricity demand on electricity distribution companies (against the view of some companies that this was too high) saying that “given all the evidence available [historic growth of 1-2% a year] we consider [that the figure of 1%] represents the most sensible global assumption to make” (paragraph 2.58 of this PDF).

For further information or advice please contact Franck Latrémolière.

Filed under Electricity, Ofgem, State aid.

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