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The Cost Plus Revenue Limit: some initial reflections

Written by Ali Lloyd

On 10 October the UK Government announced that it will implement a ‘Cost Plus Revenue Limit’ (CPRL) for low-carbon generators not covered by a CfD contract.

In any market, price is set by the marginal cost of supply, and producers who have much lower costs earn a ‘rent’. In the GB electricity market, the marginal supplier is typically a gas-fired power station, so as the cost of gas has rocketed, the rent earned by generators who do not use gas has increased significantly. The CPRL is intended to recover some of this economic rent for the Government. Whilst BEIS claims it is not a ‘windfall tax’, we would argue that it effectively is.

The intended implementation date is the start of 2023. Affected generators include ROC projects, nuclear power stations, and presumably energy-from-waste and merchant renewables.

Affected generators will be required to pay to the Government a proportion of revenues above what they would have earned if the market price was at the cap price. The cap price is not yet known – the Government’s press announcement refers to a reasonable upper estimate of pre-crisis expectations for wholesale prices. Intelligence of the Russian troop build-up on the Ukraine border first emerged in December 2021, at which point forward markets started reacting. In the two months preceding this, annual forward prices for winter 2022 and summer 2023 were trading in the range £110-130/MWh. This would imply a cap level not too dissimilar to the EU’s proposed cap level of €180/MW – this appears more plausible than the £50-60MWh reported as a rumour in the Financial Times. Interestingly, the Government has stated that generators will be allowed to retain a proportion (as yet unknown) of revenues above the cap so that they are still incentivised to maximise output when prices are high.

The exact details of how the CPRL will work are still being developed, and BEIS intends to consult on these. One option would be to impose mandatory one-way CfDs, whereby generators are required to pay to the Government the difference between the market price (based on a market index) and the cap level. However, many generators will have already put in place price hedges and so will not earn the market index. Hence the proposed approach appears to be to compare actual revenues with revenues which would have been achieved at the price cap level, and require generators to pay the relevant proportion of the difference. This is complicated as it would require generators to submit a return declaring their actual revenue, but it addresses the hedging problem.

The duration of the scheme is also unknown at this stage, with the Government stating that it will endure until markets return to normal, or until generators move onto other market arrangements such as a Contract for Difference. This appears to be designed to encourage generators to move onto the proposed voluntary CfD mechanism. However, there is as yet no information about how the voluntary scheme would work – for example how price will be determined and what the duration will be.

Hence ROC and other low-carbon generators face considerable policy uncertainty – in the short term owing to the CPRL announcement, in the medium term as a result of the proposed voluntary CfDs, and also in the longer term arising from the Government’s wide-ranging Review of Electricity Market Arrangements (REMA).

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Review of electricity market design in Great Britain

Details of AFRY’s recent public report on REMA can be found here.


Ali Lloyd - Senior Principal, Renewables, AFRY Management Consulting

Ali Lloyd

Senior Principal, Renewables, AFRY Management Consulting

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