Understanding the evolving energy landscape

1 min read

With energy usage continuing to define the strength and competitiveness of the manufacturing industry, Ian Preston, head of direct and technical sales at npower, demystifies the Renewables Obligation and Contracts for Difference.

Understanding the evolving energy landscape is crucial to the survival of UK manufacturers, with energy costs constituting a significant proportion of their bottom line. The government faces the difficult challenge of balancing policies to help UK businesses compete on a global scale, and simultaneously increasing investment to reduce the impact of climate change. Since coming into effect in the UK in 2002, the Renewables Obligation (RO) has been the main mechanism supporting the generation of large scale renewable electricity. The RO incentivises large scale renewable projects generating volumes above 5MW. To make this possible, an 'obligation' is placed on suppliers to source a proportion of our electricity from renewable sources, with this obligation level set by DECC each October. Suppliers must pay a 'buy out price' if the level is not met, which is set each February by Ofgem for the year ahead. It's not until these figures are published that we can confirm the exact cost to energy users for each MWh consumed, and then reconcile any under or over payments. However, as policy continues to evolve, from later this year and up until 2017, developers of new renewable projects will be able to choose between the RO and a new mechanism introduced by the Electricity Market Reform, Contracts for Difference (CfDs). This new mechanism should stimulate further investment in low carbon technologies by reducing uncertainty for investors and making it easier and cheaper to secure finance. Importantly, for a group of the highest energy users, known as the 'Energy Intensive Industries' (EIIs), the Government has outlined a compensation package to relieve them from some of these policy charges, indicating that this will include the costs associated with CfDs and the RO, in a bid to maintain UK competitiveness. The final design of the compensation scheme is not yet known and it will be subject to state aid approval, but it aims to reduce energy costs for some of the UK's biggest manufacturers. We're committed to working with our customers to manage their energy consumption and, more broadly, the transition to a low carbon economy. Given the important announcements on EMR anticipated from DECC this month, we will be holding a webinar to explain the outcomes of their consultation on the next steps in EMR.