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Aid to investment?

What will be the impact on the energy-from-waste sector of the planned Feed-in Tariff with Contracts for a Difference subsidy? And can such contracts support future investment? Here is a sneak preview of Envirolink and Semple Fraser’s in-depth report, due to be launched at RWM.

A report on the energy-from-waste (EfW) sector, carried out by commercial law firm Semple Fraser and Envirolink, follows the eagerly awaited draft Energy Bill which was published in May.

It outlined the Government’s ambitious plans for a full reform of the electricity market to create a secure, affordable and low-carbon sector in the UK.

Jointly authored by Fiona Ross of Semple Fraser and Katherine Burden of Envirolink, the report examines the impacts, challenges and opportunities of the Government’s plans.

The requirements for reform stem from growing uncertainty that, despite existing incentives and mechanisms, the current electricity market may inhibit the UK from meeting the 15% target for renewable energy by 2020 and the 80% carbon reduction target by 2050.  

The reform aims to increase investor confidence in low-carbon technology by setting out a number of mechanisms designed to secure long-term investment, including those attributed to EfW such as anaerobic digestion and advanced gasification and pyrolysis.

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 Feed in Tariff with Contract for Difference (FiT CfD) is expected to provide a clear, stable and predictable revenue stream for investors in low-carbon generation while providing a more robust mechanism for the Government to ensure that the UK meet its carbon emissions and renewable energy targets.

The FiT CfD aims to encourage investment in renewable technologies such as EfW by helping to secure long-term contracts between EfW generators and a third party contractor (yet to be confirmed). A fixed price (‘strike price’) would be set at the start of the contract and would be maintained for the lifetime of the contract.  

If, during the contract, the market price for electricity should drop, the contractor would top up the difference to the generator. Similarly, should the market price rise above the strike price, the generator will be required to pay the difference back to the third party contractor.

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

This is seen as an essential intervention, without which it is unlikely that we will be able to secure the estimated £110bn of infrastructure investment that is needed for future energy needs.  

But there is growing concern among industry experts that the Government’s plans for reform do not offer enough certainty for investors. And with signs of an ‘investment hiatus’ on the horizon, Semple Fraser and Envirolink investigate what the new FiT CfD means for the EfW industry.

One year on from when the original white paper was published, questions about the mechanism and the details around how it will work are still unanswered. As time marches on, this lack of detail on key aspects

of the FiT CfD, along with the proposed 2017 closing date for accreditation under the Renewables Obligation, increasingly threaten to undermine deployment of new EfW infrastructure.

The report, which will be launched at RWM, examines the short- and long-term impacts associated with the proposed FiT CfD, and discusses whether it can in fact support future investment for the EfW sector.

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