UK renewables CfD proposals reflect value for billpayers drive

Renewables project specialist James Todd of Pinsent Masons was commenting after the government opened a consultation (19-page / 244KB PDF) on draft amendments to the CfD ahead of the upcoming allocation round five (561-page / 10.1MB PDF) of the contracts. The consultation closes on 5 February.

CfD auctions are the government’s primary method of supporting renewable energy. They are designed to support low-carbon electricity generation by providing direct protection from volatile wholesale prices for developers working on projects that have high upfront costs and long lifetimes. The auctions also protect consumers from paying increased support costs when electricity prices are high.

CfDs mitigate the risk associated with price fluctuations by ensuring remuneration at a pre-agreed "strike price". If the electricity price achieved by the generator on the market falls short of the agreed strike price, the state compensates for the difference. If the electricity price achieved is higher than the strike price, the generator pays the surplus back to the state. 

To-date, the renewable CfD auctions have been held every two years, but they are now to occur annually – beginning with allocation round five in March.

“The implementation of annual CfD allocation rounds will be well-received by the sector and there will be widespread hopes that doing so represents a move towards certainty in a year where economic and policy challenges have created doubt amongst investors and developers,” Todd said.

The government published its draft amendments to the CfD for allocation round five alongside a separate consultation (32-page / 731KB PDF) that explores potential changes to CfDs for next year’s allocation round six and for subsequent allocation rounds thereafter.

Todd said: “The government is taking a more cautious and layered approach to renewables deployment than was the case at the time of allocation round four. There is still emphasis on increased deployment, with reference to the energy security strategy and the targets to deploy up to 50GW of offshore wind by 2030 and up to 70GW of solar by 2035, but there is also, understandably in the current environment, greater focus than previously on the need to ensure what it perceives as best value for billpayers.”

Among the changes proposed are new provisions aimed at preventing electricity generators from delaying the start date for their contract in order to “optimise electricity generation revenue during the target commissioning window”, the government said. Todd said that plans to require the CfD to start around the commercial operation date are not surprising in light of the government’s previously stated concerns that the existing CfD ‘start date notice’ procedure was being gamed to maximise advantage from current high wholesale electricity prices. However, he warned that lessening generators’ control over when the CfD starts may lead to uncertainty.

“The proposals for a unilateral commercial operation notice may go too far and risk fuelling uncertainty in the sector, particularly since this would risk putting projects in the position of being required to make payments to the Low Carbon Contracts Company whilst not being entitled to receive difference payments,” Todd said. “Respondents will likely seek assurance that this right would not be exercised in a prejudicial or unfair manner.”

Another notable change being introduced for allocation round five is the requirement for developers of all floating offshore wind projects of any size to apply for a supply chain plan statement from the government in order to participate in the auction. Previously, this requirement has only applied to developers behind projects with a capacity of 300MW or more, regardless of the renewables technology. Supply chain plans essentially represent a developer’s commitments to promoting innovation and skills in their supply chains with a view to improving competition and driving down the cost of generation over time.

Todd said: “It will be interesting to see how this affects the pool of CfD applicants in practice given that many floating technologies sit at an inflexion point between innovation and commercialisation.”

In its separate consultation on considerations for future CfD rounds, which closes on 7 February, the government has proposed to make any generating station which would have supported electrification of offshore oil and gas facilities ineligible for CfDs from allocation round six onwards. Todd said this “removes a potential future revenue stream for operators seeking to decarbonise offshore operations but is justified by the government as alleviating a perceived disproportionate burden on bill payers”.

“It is, however, essential that, in pursuit of the energy transition, policymakers strike a balance between protecting billpayers without narrowing or eroding potential routes to decarbonisation,” he added.

The government has also proposed to prevent offshore wind developers from obtaining CfDs for different phases of the project, potentially from allocation round six onwards. The government said that “projects are now using fewer, larger turbines with shorter installation times” and that “this suggests that phasing policy has achieved its purpose”.

Todd said: “Given potential concerns around consenting and obtaining viable grid connections, many of which are likely to allow export capacity in multiple phases, the ability to apply for phased CfDs would potentially have been a useful option for some of the very largest projects in the pipeline – including for ScotWind.”