Regen has published a new paper exploring the different models that local authorities or other local actors could implement to support new renewable generation.
The publication was launched in a webinar where we heard from Bristol City Council, Devon County Council and Greater Manchester about their approaches to getting new renewable generation built in their areas. You can watch back the event recording here.
There was particular interest in the emerging structure known as a Synthetic Power Purchase Agreement (SPPA). It has a lot of different names, but is essentially a local version of the UK government’s Contracts for Difference scheme.
Contracts for Difference are the key policy for UK government to support renewable and low-carbon electricity generation. In these agreements, the customer does not purchase power directly but instead obtains price protection for projects, ensuring a minimum price for the power that the project generates. In return, if the price goes above the ‘strike price’, then the excess is repaid to the government or guarantor.
With the unprecedented price rises in the energy markets, this approach has now started to pay back millions of pounds into the UK government coffers.
The fourth round of UK Contracts for Difference opens in December and the allocations highlight the value for money that these structures could potentially provide to the taxpayer. Pot 1 allocation for onshore wind and solar PV is expected to cost only £10m to achieve a huge 5GW of capacity. As a comparison, £200m has been allocated to support around 12GW of offshore wind. In Pot 1, it is expected that these relatively low cost technologies will involve significant repayments to government, rather than the other way round (see our latest insight piece on this here.)
But, unfortunately, the national scheme is not something that small and medium sized projects can access. This national process is for the big projects, who have the time and resource to bid into to something that they may not win. This means that the projects with the most potential to provide local benefits lack any policy support.
The good news is that a number of local authorities are now exploring their own local versions of this national scheme. Devon County Council, who were among the speakers at our event, is one of the first to explore this model and the South West Energy Hub have has produced a short guide on how to take this approach forward.
Regen’s report explores the pros and cons of an SPPA (see page 15 of the guide), the key pros being that the contract provides electricity price certainty (hedging against future price rises) but, unlike a sleeving PPA (see page 13), does not impact the electricity procurement processes within the council which are likely to be embedded and need to be renegotiated regularly.
There are of course cons to the SPPA model, particularly around the complexities of holding a financial derivative and implications for finance departments and balance sheets.
But, once these hurdles can be passed and the model normalised, we think there is significant potential that local Contracts for Difference could be a viable process to support new local renewable projects – and maybe generate some welcome additional money for the council at the same time. A win-win.
Read Regen’s guide here for more detail on the pros and cons of SPPAs, as well as five other models.