Future of Energy

The challenges of the generation game

Posted on 09 January 2020
By Mark Smith
Mark Smith
Flexibility Services Commercial Manager, npower Business Solutions

Mark has worked in the energy industry for more than 20 years, having started his career at Yorkshire Electricity before moving to npower Business Solutions (nBS) in 2002. Mark has vast experience across various sales and commercial roles at nBS, and has spent many years structuring and negotiating commercial Power Purchase Agreements (PPAs), providing effective routes to market for generated power, as well as associated renewable certificates on behalf of nBS customers.

I know we often say this, but when it comes to energy, we really do live in uncertain times. And energy generators might well be nodding in agreement more vigorously than most in the sector.

As the UK tries to navigate its way to net zero – and adapts to the loss of large-scale coal and older gas plant – finding new ways to generate the energy we need, while also supporting more intermittent supply, is going to be challenging.

Yet rather than encourage new generators to the market, you could be forgiven for thinking that the current climate is dissuading investment. (Although, there is some good news to come – so keep reading!)

Embedded benefits slashed

Ofgem’s recent Targeted Charging Review (TCR) of embedded benefits has slashed generator income.

The reforms to the transmission residual charge mean that Triad avoidance incentives will disappear in April 2021.

Balancing Services Use of System (BSUoS) payments will also stop from April 2021. But at least the threatened double whammy of flipping this credit to a charge hasn’t come to fruition.

Instead, Ofgem has appointed a Balancing Services Task Force to consider how best to structure recouping this cost, so we’ll await the outcome with interest (and keep you posted).

CfD prices at record lows

Eligible generators looking for increased value elsewhere have so far been disappointed after the last Contracts for Difference (CfD) auction of 2019 cleared at £18/MWh less than the previous one.

Certainly, for wind generators, it’s not great news.

According to Cornwall Energy: “The rapid fall in cleared prices for offshore wind since the first CfD allocation round is profound, amounting to a 66% reduction in less than five years.”

Anyone looking for higher prices from forward hedging in the wholesale market is also going to be let down. This winter, the UK’s well-supplied gas reserves and predictable weather are keeping prices low – at least for now.

(Of course, it’s worth noting that all these negatives are good news for consumers, who pay lower prices for the energy they use.)

Positive news to come

But before you get too depressed, there is also some good news.

We are seeing growing demand for corporate Power Purchase Agreements (PPAs), as companies looking to either fix or green their energy supply seek private long-term deals with generators.

This appetite for green credentials has also meant an increasing interest in Renewable Energy Guarantees of Origin certificates (REGOs).

Generators will be hoping this continues and a transparent market for realising additional value from these certificates develops.

The income stream from Renewables Obligation Certifications (ROCs) continues to strengthen as the buy-out price increases yearly.

Ofgem will set the next buy-out value early in 2020. And although a lot of focus has been on the triggering of the mutualisation process this year (to recoup unpaid levies), it’s easy to overlook the fact that the published recycle value for 2018/19 is the highest since 2011.

New incentives to emerge

Once the Triad signal disappears, we’re likely to see new incentives emerge to find a way of replacing the 2GW additional demand over the winter peak that the Triad currently saves.

For starters, for those generators eligible to participate in the Capacity Market (CM), there are good reasons to believe we’ll see a stronger price out-turn in forthcoming Q1 2020 auctions.

National Grid’s System Needs and Product Strategy (SNAPS) review is also looking at potential new products and balancing services, and will be running trials for new reserve and frequency response schemes this year.

Any generators with battery storage or gas peaking plant will be a big part of this focus, so there are likely to be new revenue streams in the pipeline.

Short-term market opportunities

Along with the loss of 2GW of peak demand saving as a result of the Triad’s demise, growing power requirements from electric vehicles and home heating are set to increase volatility in the short-term wholesale markets.

So generators with flexibility are well placed to take advantage of opportunities in the Day-Ahead and Within-Day markets.

We’ll be bringing you more detail about these new opportunities – and how to ensure you’re best placed to take advantage of them – over the coming weeks and months.

But for now, if you need any advice or would like an honest review of your current and future revenue streams, do get in touch with our Generation Services Team. You can contact them via Energy HQ by calling 0800 193 6866 or sending an email to nBS@npower.com.

Comments

Your email address will not be published.


Contact us

Find out how Energy HQ can benefit your business