DECC opens consultation on Offtaker of Last Resort proposal

By Erin Voegele | February 13, 2014

The U.K. Department of Energy and Climate Change has opened a public consultation on its Offtaker of Last Resort proposal, which would provide eligible renewable electricity producers with a guaranteed backstop route-to-market at a discount to market prices. The proposal is essentially designed to help independent renewable generators gain access to the energy market.

Energy Secretary Edward Davey issued a statement on the proposal, noting that it imperative to the goals of the government’s Electricity Market Reform program that independent renewable generators are able to access the energy market. “The Offtaker of Last Resort will be vital to improve the route-to-market options for such generators, which will help unlock a significant pipeline of projects and bring essential competition, diversity and innovation to the market,” he said.

Information included in the proposal explains that the OLR mechanism aim to encourage investments from independent renewable generators by providing a backstop route-to-market, while provides generators and their lenders with greater confidence in the power purchase agreement (PPA) market when making investment decisions. The OLR would also promote competition in the emerging contracts for difference (CfD) PPA market and would reduce risk and cost of investment in renewable technologies.

According to the proposal, eligible generators would be guaranteed a backstop PPA with an offtaker and would be able to access the backstop PPA throughout their CfD, with the terms grandfathered form the point of CfD signature. Offtakers would be allocated to generators through a competitive process.

Power purchased through the backstop PPA would be purchased at a significant discount to the market reference price in their CfD. According to the DECC, the discounted price avoids the risk that the commercial PPA would be undermined. 

The proposal explains that the OLR is designed to provide lenders and finance providers with an assurance of minimum revenues that a particular project will receive, reducing the cost of raising financing for generators and enabling them to secure lower-cost debt finance without needed a long-term PPA with a creditworthy entity.

Within the proposal, the DECC states it intends to allow all renewable CfD generators to access the OLR irrespective of size or technology type. The DECC also intends to require some suppliers to bid for backstop PPAs to ensure the mechanism is deemed bankable and promotes sufficient competition. The mandatory offtakers will be determined by their supply market share by volume. Licensed suppliers wishing to provide backstop PPAs are also able to act as voluntary offtakers.

Regarding pricing, the proposal considers discounts between £20 per megawatt hour (MWh) and £30 per MWh, but notes that the DECC’s preferred discount would be £25 per MWh.

The DECC is asking for stakeholder input on a wide variety of issues, including whether or not the OLR would be open to all renewable CfD generators and whether a limit should be set on the size of eligible projects.

The full proposal can be downloaded here. The consultation closes on March 24. More information on how to submit a comment is available on the DECC website. The government is expected to publish its response to the comments this summer.