Will energy reforms prove electric for EfW?

Under the new electricity market reforms, can contracts for difference support future investment for the energy-from-waste sector? Fiona Ross attempts to find out

The UK’s electricity market is undergoing a significant facelift. Last year the Government published its White Paper on electricity market reform for secure, affordable and low-carbon electricity. Published alongside this was the Renewables Road map which set out the potential role of the energy-from-waste (EfW) sector in the UK’s future energy mix.

One year on from when the paper was published, questions over the mechanism and the details around how it will work remain unanswered. As time marches on, the lack of clear detail on key aspects of the feed-in tariff contract for difference (FiT CfD), along with the proposed 2017 closing date for accreditation under the Renewables Obligation, increasingly threatens to undermine deployment of new EfW infrastructure.

The Renewables Roadmap indicates that the EfW sector has the potential to deploy up to 6GW of biomass electricity by 2020 with the majority of the growth being met by the conversion of coal plants, dedicated biomass generation, biomass waste combustion and anaerobic digestion (AD).

In the first quarter of 2012, energy generated from waste including landfill gas, biomass, AD and other advanced conversion technologies made the single largest contribution (4%) to the total (11.1%) renewable electricity generation.

It is estimated that up to £110bn of infrastructure investment is required to meet our renewable energy generation and carbon reduction targets. The challenge for this sector is how can we improve investor confidence and bankability in order to grow at the scale and pace that is required?

One of the key proposals of the Government’s paper on electricity reform was the introduction of a new subsidy that would replace the existing Renewable Obligations. The FiT CfD is seen to provide a clear, stable and predictable revenue stream for investors in low carbon generation whilst providing a more robust mechanism for government to ensure that carbon emissions and renewable energy targets are met.

The mechanism works by offering a long-term contract between low carbon generators and a contract counterparty. The contract helps generators to stabilise their revenues at an agreed price (strike price) for the duration of the contract, with payments flowing between parties depending on the market electricity price.

The introduction of such a mechanism is designed to encourage investment by providing long-term certainty on revenues, improve market liquidity, lowering capital costs and removing barriers to entry for new entrants to the market.

Whether this will work in practice remains to be seen. At Semple Fraser we have undertaken research with Envirolink to analyse the short and long term impacts of the FiT CfD on the EfW sector and discuss whether contracts for difference can in fact support future investment for this market. A report on the findings will be released next month.

Fiona Ross is a waste industry group associate at Semple Fraser (Katherine Burden at Envirolink also contributed to the article)

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