Overview

Is Whitehall losing faith in the power of free markets to deliver the goods when it comes to climate change?
The Government’s fix looks like taking the form of a contract for difference (CfD) mechanism bolted onto the existing market structure. Its current consultation on the Renewables Obligation (RO) includes a proposal that generators should be relieved of wholesale power price risk (and possibly also Renewables Obligation Certificate (ROC) price risk) through a long term CfD which swaps exposure to price volatility for a fixed reference price. The aim is twofold: to boost investor comfort while guaranteeing a reasonable
return on the one hand and to reduce the risk of over-compensation, so minimising the cost of the RO to consumers, on the other. A long-term contracted approach also mitigates the current regulatory uncertainty arising from the Government’s refusal to commit to ‘grandfather’ existing incentives.

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