How Licence Exempt Supply and P442 Could Unlock Long-Term Value

Originally written by Evolve Energy and published by the British Hydropower Association

The UK’s hydropower sector has long provided reliable, local generation. Yet for many small-scale operators, the challenge has been less about ambition and more about access. With subsidy routes closed to new entrants and non-commodity costs rising, proven assets have often been undervalued in a system that wasn’t built with them in mind. The introduction of P442 in February 2025, combined with the opportunities of License Exempt Supply, could mark a turning point - helping hydro shift from survival mode to long-term resilience.

The Hydro Access Gap

For years, many hydro schemes have been constrained by structural barriers. The settlement system lacked the ability to track exempt supply at a granular level, making it impractical to combine exemption with licensed supply in a compliant way. As a result, operators defaulted to standard PPAs, limiting financial outcomes. At the same time, new subsidy schemes closed, leaving smaller assets exposed to charges and levies that eroded margins. The mismatch between reliable generation and limited access slowed investment in a sector that should be contributing more to the Net Zero transition.

Complexity vs. Progress

This is where P442 matters. By reforming the Balancing & Settlement Code and introducing the role of the Exempt Supply Notification Agent (ESNA), the market now has a mechanism to properly account for exempt volumes. What was once an administrative obstacle has become an enabler. For hydro generators, this opens the door to scalable, transparent use of Class A exemption - and with it, the chance to capture more of the value their output creates.

Unlocking Value

When structured correctly, Class A supply avoids several non-commodity charges, including:

• Renewables Obligation (RO)

• Feed-in Tariff (FiT)

• Capacity Market (CM)

• Contracts for Difference (CfD)

According to Cornwall Insight’s June 2025 forecast, these levies now total £62.31/MWh, equating to over £2.7 million of additional value each year if a generator is able to fully utilise the 5MW/hour exemption allowance. This is made possible through a virtual private wire model, connecting generators to demand customers via a licensed supplier. The outcome is higher returns, renewable-only supply, and transparent settlement.

Who Can Benefit

This route is particularly relevant for sub-5MW hydro assets not in receipt of RO or FiT. To take part, sites must:

• Supply no more than 2.5MW per half-hourly period, matched to demand

• Operate without RO or FiT support

• Be paired with a matched demand customer, facilitated by an accredited ESNA partner

For eligible operators, this is a practical path forward - one that turns regulatory change into commercial opportunity.

Reframing the Challenge

The Net Zero transition is not just about new technologies; it’s about ensuring existing assets can thrive. Hydro’s reliability has always been an advantage, but without the right market framework, that reliability has come under strain. Now, with P442 in place and exemption routes clarified, hydro can be repositioned as a strategic contributor - resilient, investable, and integral to the UK’s low-carbon future.