Green energy budget faces squeeze as power prices forecast to stay flat this …

July 3, 2014 by  
Filed under Green Energy News

The forecast could be good news for consumers as it would lead to retail
prices increasing “less steeply” than feared, Mr Phillips said, although
tariffs would still increase overall, “driven by renewable subsidies [and]
network investments”.

But he said it would also mean that more of the budget for green subsidies –
the “Levy Control Framework” (LCF) – would be used up than if prices rose.

Under a new system of subsidy contracts, green energy generators will be
guaranteed a price for the power they produce, meaning that consumers will
pay the same for this electricity, irrespective of the market price. But the
lower the power price, the greater “top-up” subsidy the generator requires.

Stephen Lovegrove, DECC permanent secretary, disclosed on Wednesday that
falling wholesale prices in recent months had already eaten into its budget.

He told the Public Accounts Committee that the department had planned to use
up 50pc of its budget on subsidy contracts for eight projects it handed out
earlier this year. But these projects were now forecast to use up 58pc of
the budget because power prices had fallen.

Peter Atherton, utilities analyst at Liberum Capital, said: “There is a real
issue with the LCF budget.” He said that as well as the initial eight green
projects, the boom in solar farms was also “eating up a lot of it” and “if
the wholesale power price turns out to be lower that will eat up another
chunk”. This left questions over whether enough money was left to meet the
government’s green targets.

Consultants Aurora Energy Research recently forecast the power price would
decline to £46/Mwh in 2020 and warned that on this basis the LCF would be
exhausted and “would fail to deliver the target amounts of low-carbon

Aurora said that the Government’s decision to freeze the carbon tax, the lower
gas prices, and the impact of more wind farms being built would all depress
the power price. A spokesman for DECC said that when drawing up its policy
it had considered a range of wholesale price projections for 2020, from
£42/MWh to £81/MWh.

“The cap on costs through the LCF is designed to take into account a range of
factors, including changes to fossil fuel price projections,” she said,
adding that DECC remained “confident” the budget could fund as much
low-carbon electricity as planned.

Moody’s report also said that if power prices stayed at current levels,
gas-fired power plants would continue to struggle to be profitable, but
“coal plants should fare better”.

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