Two energy industry trade bodies have backed a plan to ensure that older wind and solar farms return some of the massive windfalls they are getting amid hugely inflated electricity prices.
The plan, also backed on Thursday by fellow trade body Renewable UK, would move wind and solar farms built under the old Renewables Obligation subsidy scheme on to the newer Contracts for Difference (CfD) system.
Removing the link between gas and retail electricity prices will be complex and take time, but this solution provides a quick fix for up to 40% of our generation capacity
Adam Berman, Energy UK
This would mean that when electricity prices are unusually high, these old wind turbines would pay back some of their windfall profits straight to households and businesses.
On top of the estimated £10.8 to £18 billion that households could save every year, the plan would save organisations between £6.7 billion and £11.1 billion, Energy UK said.
Energy UK deputy director Adam Berman said: “The current energy market doesn’t allow customers to fully benefit from the cheapest form of electricity – domestically produced low-carbon generation.
“This proposal could reduce bills by up to £18 billion per annum, delivering much needed cuts to bills for both households and business customers.”
The change would sign wind farms up to a system where they are always guaranteed a fixed price for every megawatt hour (MWh) of electricity they produce. The guarantee is known as the “strike price”.
This means that if prices on the wholesale market are lower than the strike price, the wind farm will be handed a top-up to cover the difference.
— RenewableUK (@RenewableUK) September 1, 2022
But when prices are high – as they are now – the wind farm has to return the cash it has made above the strike price to electricity buyers.
It comes as energy prices soar for millions of households. In October, the price cap will rise to £3,549 for the average household.
But this cap would have been even higher without CfD generators. Over the October price cap generators will return £23 to each household.
This figure would increase significantly, to £150-£250, under Energy UK’s plan.
The decision is part of a larger discussion about how to ensure that cheap renewable electricity is not sold at the same price as expensive electricity generated by burning gas.
Mr Berman said: “By giving generators the chance to secure a longer term agreement with lower returns in place of selling electricity at wholesale market prices, this scheme would be a significant first step to decoupling gas from retail electricity prices.
“Removing the link between gas and retail electricity prices will be complex and take time, but this solution provides a quick fix for up to 40% of our generation capacity.
“Much will depend on the details of the scheme, but with gas prices likely to remain high for some time, we are confident that it can deliver significant savings for customers next year.”
RenewableUK chief executive Dan McGrail said: “We’ve been discussing these proposals with our member companies in detail to ensure that the changes are designed in the right way and are fully deliverable, so that we can maximise savings for bill payers.
“It makes no sense to allow the exorbitantly expensive cost of gas to set the price for the whole of the electricity market. This proposal is a step forward towards breaking that outdated link. It will enable billpayers to benefit more from the vast amounts of low-cost electricity being generated by wind and other renewables, which are our cheapest new power sources.”
He said that the proposals had “widespread support” among his members.
The first wind projects won CfD approval in 2015, while the Renewable Obligation scheme closed to applications in 2017.
Around 40% of Britain’s electricity comes from Renewable Obligation contracts, which also include some nuclear power.
The proposal from would mean these generators give up their current higher returns in return for locking in a price long-term.
But Renewable UK pointed out that most of the Renewable Obligation producers had signed deals a year or more in advance, and that these would not benefit from the wholesale costs.