"Electricity Market Reform: Allocation of Contracts for Difference"
Consultation on Competitive Allocation
"This consultation document seeks views on the Government's approach to allocation of Contracts for Difference (CfD). Responses are invited from all interested parties by 12 February 2014."
This document excludes reference to Generation III Nuclear, which involves a separate process that is as secret negotiated, as it is uncompetitive. (Even uncompetitive compared with what most engineers could come up with on the back of a fag packet).
Independent electricity generators will also have to negotiate separate Power Purchase Agreements (PPAs) with electricity suppliers, once they get a Contract for Difference.
The price that these independent generators get for their electricity will not necessarily be the same as the reference price calculated by government. I now present a gross simplification of the process that is likely to ensue once an independent generator is awarded a contract for difference for your amusement...
Lets say an independent onshore wind generator is unexpectedly awarded a Contract for Difference (CfD) of £94 per MWh from DECC, after outbidding other competitors by £1 per MWh. The independent generator then goes to one of the big six and a half to negotiate a long term Power Purchase Agreement (PPA) type contract on the basis of its shiny new DECC awarded CfD.
The independent generator's guaranteed levy income is limited to the "strike price" minus the "reference" price. [This is guaranteed even if the generators electricity is sold to energy intensive industries on energy welfare, for which this calculation doesn't technically apply. In this case the generators income is topped up as if it did apply, by extra levies on everyone else, including the fuel poor. Do you ken (understand)? [I must point out that the full details of how the new energy welfare system will work have not been finalised yet. I expect that individual firms that apply for and recieve monthly energy wefare benefit cheques won't want to advertise this fact. We may never get to know what it feels like being on energy welfare benefits]
The independent generator will presumably want to negotiate a variable price as part of its long term PPA contract, not a fixed price. If they negotiate a fixed price they could possibly lose a large part of their levy in future years if the market/reference price increases substantially. (The reference being tied to the market price by some agreed formula. It should also be pointed out that the reference price could later shift relative to the market price, in some systematic fashion, if someone like me gets into government and changes the formula.)
However the big six and a half firms will say "what is the point of negotiating a long term deal if we can't negotiate a fixed price or substantial discount on the market rate". If fixed prices are off the table, then they may ask that the negotiation must cover the very big risk that future governments will want to fiddle with the reference price definition and with other related calculations to make the subsidy system less generous.
The independent generator may want to negotiate a price that slightly discounts the reference price set by government. The big six and a half firms will presumably want to negotiate a price that discounts the actual market price, so that if a future government decides to increase the reference price above the market price, the independent generator loses out, not them.
However even if they work out some deal based on how the reference price definition may or may not change in future, what does the "market price of electricity" really mean anymore anyway.
If future changes to the definition of "reference" price have been stopped by high end legal counsel drafting water tight contracts, then the last port of call for future governments will be to redefine what is meant by the "market" price. This will be possible because the new electricity "market" will be entirely a crony-capitalist creation of government anyway, and not a real market system at all. How do all parties protect themselves from that?
The Government thought that they were being really clever in coming up with a plan to reduce electricity firms future investment risk. The truth is that the opposite is now happening: they are replacing the risk that one or two of the big firms may choose the wrong investment strategy in difficult circumstances and fail, with the risk that there is a complete systematic collapse of the entire electricity system, with complete nationalisation as the end game. Some people, like Ed Miliband, will see this as a good thing, which of course amplifies this risk for investors considerably.
The risk that future law will clamp down on the mistaken and misguided practices of previous administrations is far greater, in my opinion, than most other sorts of market based risks that electricity firms would normally face in trying to honestly provide the best electricity deal they can for their customers, in open and free competition with other suppliers.
The countries first world war motto continues on today with even greater resonance now: "British Lions lead by Donkey's".