The UK Department for Energy Security and Net Zero (DESNZ) has published a report by Frontier Economics.

The report assesses potential reforms to the GB renewable electricity support arrangements, alongside its second Review of Electricity Market Arrangements (REMA) consultation. 

Contracts for differences (CfDs) are the primary tool for supporting new investment in renewables in the GB electricity system.  CfDs insulate investors from wholesale price risk, and as a result reduce the required rate of return by investors and therefore the cost of support payments ultimately borne by consumers.  

DESNZ asked Frontier to assess the implications for investors and overall system efficiency of exposing investors to more market risk.  On the one hand, it might drive system efficiency through improvements in how renewable generators are dispatched, and in terms of which technologies are built in future.  On the other hand, it may increase the required rate of return, and, in turn, consumer costs. 

Our work analysed this trade-off for different renewable support options including a number of alternative CfD models as well as a revenue cap and floor, each with and without a potential move to zonal pricing.  We worked with Cornwall Insight who tested our findings through a series of investor interviews.  Our analysis has informed DESNZ’s decisions to rule out options such as a strike price range and a revenue cap and floor, and to consult further on specific CfD reforms which include de-coupling support payments from output and changes to the reference price.  

Frontier regularly advises on electricity market design issues in the UK, Europe and internationally.  

Together with industry experts, we considered issues related to low-carbon support mechanism design in our recent webinar: title of webinar.  

Click here to watch the webinar: Deploying low-carbon power at scale

Click here to read the full report: Market signals and renewable investment behaviour