DECC Publishes NERA Study on Cost of Capital Implications of Change in UK Renewables Support
The UK Department of Energy and Climate Change (DECC) published a major study conducted by NERA Economic Consulting (NERA) that assesses the impact of the UK’s planned changes to renewable electricity support policy on investors’ cost of capital, a key component in the determination of the level of subsidy through the “strike price”. NERA, a leading global provider of economic advice and analysis, sets out how the risks facing investors will change as a result of the planned shift from the existing tradable certificate system (the “Renewables Obligation”) to a price-based support system (“Feed-in tariffs with contracts for difference”). The report was published by DECC alongside the UK government’s Electricity Market Reform Delivery Plan, and follows the government’s publication of final strike prices earlier this month.
NERA’s report, “Changes in Hurdle Rates for Low Carbon Generation Technologies Due to the Shift from the UK Renewables Obligation to a Contracts for Difference Regime,” considers in detail the change in risks associated with the planned transition to a system under which renewable and low-carbon electricity producers enter into a contract to produce electricity at a pre-agreed strike price. The new system based on Contracts for Difference (CfDs) is intended to guarantee low-carbon generators a stable revenue stream, with the aim of bringing down the cost of capital.
NERA’s experts, led by Directors Dr. Richard Hern and Dr. Mauricio Bermudez-Neubauer and Associate Director Dan Radov, reviewed and assessed several sources of evidence, including responses to DECC through the Electricity Market Reform consultation process, concerning the costs of financing low-carbon generation under CfDs. In particular, NERA’s experts compared the factors influencing the cost-of-capital under the RO to the factors under CfDs..
NERA’s analysis found evidence of a significant reduction in risk as a result of reduced exposure to wholesale electricity price volatility, but this is offset in part by increases in other sources of risk, notably the risk that subsidies may not be available when a project seeks to qualify for them. These risks are sometimes referred to as “allocation risks”, some of which are related to construction delays, and are likely to be more relevant for offshore wind projects, which have higher costs and more uncertain development and construction periods. Additionally, NERA found that there may be an initial “novelty premium” related to uncertainties about how the new system will work in practice, which while it persists could counteract the reduction in the cost of capital.
The report sets out principles for determining the change in cost of capital for all technologies under the CfD regime relative to the RO. These principles were used by DECC as part of its final determination of strike prices for different renewable generation technologies.
To see the full report, please click here: https://www.gov.uk/government/publications/nera-economic-consulting-report-changes-in-hurdle-rates-for-low-carbon-generation-technologies
NERA Economic Consulting (www.nera.com) is a global firm of experts dedicated to applying economic, finance, and quantitative principles to complex business and legal challenges. For half a century, NERA’s economists have been creating strategies, studies, reports, expert testimony, and policy recommendations for government authorities and the world’s leading law firms and corporations. We bring academic rigor, objectivity, and real world industry experience to bear on business and legal issues involving competition, regulation, public policy, strategy, finance, and litigation.
NERA’s clients value our ability to apply and communicate state-of-the-art approaches clearly and convincingly, our commitment to deliver unbiased findings, and our reputation for quality and independence. Our clients rely on the integrity and skills of our unparalleled team of economists and other experts backed by the resources and reliability of one of the world’s largest economic consultancies. With its main office in New York City, NERA serves clients from more than 25 offices across North America, Europe, and Asia Pacific.
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