The U.K.'s Department of Energy and Climate Change (DECC) plans to introduce a new energy policy that will include renewable energy initiatives and strategies to meet the U.K.'s carbon-reduction obligations.
One of the provisions included in the new energy policy is the "contracts for difference" (CFD) mechanism, which allows for long-term contracts that provide stable revenues for investors in low-carbon energy projects at a fixed level, known as a "strike price," the DECC says.
According to the DECC, these contracts will help developers secure the large up-front amounts of capital investment required for low-carbon infrastructure such as offshore wind farms, nuclear powers stations, and carbon-capture and -storage plants.
By providing a fixed price, the contracts will help lower the cost of capital and protect consumers from high bills by clawing back money from generators if the market price of electricity rises above the strike price, the DECC explains.
In addition, the U.K. government will establish a new body to act as a single counterparty to the CFDs with eligible generators. The counterparty will have levy-raising powers to enable it to raise funds from suppliers to meet its costs, including payments to generators.
Furthermore, a capacity market will provide an insurance policy for government against future supply shortages, as there is an increased risk to security of electricity supplies toward the end of the decade, when a fifth of the U.K.’s existing capacity is set to close. As part of this initiative, more intermittent (wind) and inflexible (nuclear) generation will be built over time to replace the retired plants.