July 23 (Bloomberg) -- The European Commission approved the U.K. government’s renewable energy contracts and so-called capacity payments, saying the program that benefits power plants complies with state-aid rules.
Britain has reformed its energy market to provide wind farms and solar and biomass plants with deals known as contracts for difference. Those encourage investments by guaranteeing payments for 15 years. The U.K. government will underwrite about 80 percent of power demand through capacity-market payments to fossil-fuel-fired power plants and to nuclear reactors in return for ensuring electricity is provided when needed.
The renewables payments are “a fine example of how to promote the decarbonization of the economy with market-based support mechanisms,” Competition Commissioner Joaquin Almunia said today in a statement. The capacity market “embraces the principles of technology neutrality and competitive bidding to ensure generation adequacy at the lowest possible cost for consumers,” he said in a second statement.
The commission also approved of early contracts worth 9.7 billion pounds ($17 billion) that the U.K. awarded to five offshore wind farms. Three of those are run by Dong Energy A/S, one by SSE Plc and another by a venture between Statoil ASA and Statkraft AS.
The U.K. is trying to ensure the lights stay on while boosting the proportion of power it gets from renewables such as solar and wind power, where generation varies with the weather. The gap between supply and peak demand may fall to as low as 2 percent in the 2015-2016 winter from 5 percent now because of power-plant closures, the energy regulator Ofgem says.
U.K. Energy Secretary Ed Davey welcomed the Commission’s announcements, saying the decisions show “that our major reforms to the electricity markets are urgent and needed to turn around the historic neglect of the sector.”
The statement on renewables didn’t mention three other early contracts the government awarded. Those include one to Drax Group Plc for a project that converts a coal-fired unit to burn with biomass, another biomass conversion plant by Lynemouth Power Ltd. and a third biomass-fueled combined heat and power plant by MGT Power Ltd.