7 February 2023
Etchea Energy response to BEIS' Consultation on policy considerations for future rounds of the Contracts for Difference scheme
Dear BEIS Team,
Thank you for giving us the opportunity to provide comments on the consultation on the Contracts for Difference scheme (CfDs).
Etchea Energy Partners is an independent firm providing management and consulting services to clients operating in the energy sector, including interconnectors and multipurpose interconnector (MPI) projects.
Our comments to this consultation are focussed on the CfDs and their impact on the development of MPIs. Where appropriate we have responded to individual questions raised in the consultation.
5. Do you believe that an MPI-OFW should be eligible to apply for future CfD rounds?
Please provide details/evidence of your reasoning, including around the impact of eligibility on the sector, decarbonisation, security of supply and cost to consumers of electricity.
The eligibility of an MPI-OWF to participate in future CfD rounds is consistent with other OWFs in the UK and OFWs in neighbouring jurisdictions. The creation of a level playing field is important to avoid discrimination within the same generation source. However, there are a number of considerations for BEIS to review in determining how CfD terms may need to be changed to accommodate an MPI-OWF.
European CfD development
Maximum decarbonisation will be achieved by ensuring offshore generation is dispatched to displace fossil fuel power irrespective of the supply/demand dynamic in the home market. We expect curtailment of OFWs with more than one zonal connection to be less than those with a single connection point. The MPI pilot projects announced in Ofgem’s recent note on its Window 3 process has identified two advanced projects to Belgium and the Netherlands. Both projects would allow for a connection of OFWs to the GB market and the respective continental grids.
This consultation addresses internal solutions for GB, however OFW investors will require an understanding of the application of regulation to revenues in the other market to make an informed investment decision. There is a risk that the UK establishes a CfD model for UK MPIs that is inconsistent with the same being developed by its neighbours and frustrate the implementation of MPI projects. Further information on BEIS’ discussions with its European counterparts on this point would help.
The successful implementation of the hybrid interconnector scheme at Kriegers Flak in the Barents Sea (between Germany and Sweden) provides an example of the EU’s direction of travel on hybrid interconnector policy. In this case private wind developers cooperated with the Danish and German TSOs who provided the interconnector infrastructure and control system. Importantly, the Kriegers Flak MPI secured a derogation from Article 63 of Regulation EU 2019/943 allowing the KF OFW priority access to the interconnector cable to ensure despatch. Obtaining a derogation to ensure priority access to the interconnector cable in both jurisdictions will be necessary for any MPI-OFW to establish a business case and reach final investment decision (FID).
Alternative merchant models
CfD strike prices continue to fall and in some European jurisdictions, OFW developers do not seek a CfD to proceed to FID. However, the increased risk in developing an MPI may need to be reflected in the commercial terms of a CfD attributable to these new hybrid projects.
Providing a CfD scheme that supports MPI-OFW would incentivise developers to come forward with projects in the near term, provided the scheme was structured in a way that recognised the greater risks and costs for early projects. For example, developers may not be able to reach FID on the basis of the strike prices seen more recently in the CfD scheme. Accordingly, in order to provide a level playing field for MPI-OFW, it may be beneficial for there to be a separate allocation available to MPI-OWF, at least in the short term, which may clear at a higher price. This would support early projects coming forward, without impacting the strike price for the wider auction.
In addition, MPI-OFW would be adversely impacted if the market arrangements changed from the current Home Market arrangement, to an Offshore Bidding Zone (OBZ). Accordingly, any CfD scheme applying to MPI-OFW should include a mechanism to keep developers whole for any adverse commercial impact should there be a change in market arrangements part way through the term of the CfD.
BEIS should also consider providing certainty to MPI-OFW as to the arrangements that would be available after the term of the CfD, as developers of MPI-OFW may not be able to reach FID on the basis of a 15 year support scheme. This is a particular issue in the context where the associated MPI transmission assets are supported by a 25 year Cap & Floor regime from Ofgem. This will depend on the overall regime design for MPIs, including the application of Ofgem’s Cap & Floor regime and mechanisms for the redistribution of revenues.
The proposed MPI business models identified in the Consultation includes the OBZ. This appears to be the model favoured by TSOs and the EU and would be based on a central capacity allocation algorithm. The EU already operates such a market coupling mechanism, commonly known as Euphemia. GB’s decision to exit the Internal Energy Market has led to GB interconnectors no longer participating in Euphemia. The proposed Multi-Region Loose Volume Market Coupling (MRVLMC) agreed in the EU-UK Trade and Cooperation Agreement (TCA) will be a close approximation to replace full market coupling. BEIS and Ofgem will need to consider if MRVLMC could be employed to determine flows and pricing for OBZs. The TCA had anticipated the implementation of MRVLMC by mid-2022. Clearly further work is required by all parties to find a common market coupling model that can facilitate the development of MPIs in a timely manner.
6. What changes, other than those identified above, would be required to allow the
participation of MPI-OFW in the CfD scheme?
There are a number of changes that would be required to allow the participation of MPI-OWF in the CfD scheme. Two important changes that may need to be implemented are:
Profit allocation between MPI interconnectors and MPI-OFWs
Under the OBZ model, MPI-OFWs are expected to obtain a price for their generation at the lower of the two connected markets, placing them at a potential disadvantage to the OFWs in the home market. On the flip side, the MPI-Interconnector will benefit from the arrangement and see greater congestion income. To compensate the MPI-OFW, an allocation of revenues could be made between MPI-OFW and MPI-Interconnector to keep the OFW whole and maintain a level playing field. This arrangement would need to be anticipated in the future CfD mechanism.
Existing OFW’s connecting to the UK home market are liable to network charges whereas interconnectors are not. Investors will require clarity as to the enduring regime for a future network charging methodology for radial connected OFWs versus MPI-OFWs. Consideration will need to be given to the future pricing model of MPI-OFWs to ensure a level playing field for OFWs and avoid discrimination. Under the OBZ business model the MPI-OFW would be in the same boat as the cross-border interconnector transactions and should be treated the same.