A study carried out by Aurora Energy Research has found that the government has overestimated the future cost of electricity.
This means that the government will need to pay higher subsidies to green energy producers, as the current agreement in place sees green suppliers paid lower subsidies when energy prices are high and higher subsidies when prices are low.
Capped funding for subsidies causes market uncertainty
The combination of lower than expected electricity prices and the need for the government to pay out higher subsidies is particularly relevant as the government has set a limit to the amount of funding which will be allocated to subsidies.
The latter is part of the Levy Control Framework, which seeks to limit the cost of energy initiatives subsidised through consumer energy bills.
As a result, Aurora’s report suggests a number of high profile offshore wind projects have been scaled down as suppliers are unsure what level of subsidies they will receive in the future.
If projects continue to be shelved, the UK is expected to struggle to reach its legally binding objective of producing 15% of all energy from green sources by 2020.
DECC’s figures significantly lower than market estimates
According to Aurora the wholesale price of electricity will fall from £51 per megawatt hour in 2013 to £46 per megawatt hour in 2020. DECC, however, estimated that electricity prices would sit at around £68 in 2020.
Speaking to the Financial Times, a spokesperson from DECC said: “Our projections for wholesale gas prices and the new electricity market are based on long-term trends rather than short-term fluctuations in prices.”
Chief Executive at Aurora John Feddersen said: “The world has changed substantially since DECC made its forecasts.
“Gas is a lot cheaper than it was, carbon price support has been frozen and there is more renewables penetration.”