Contracts for Difference: a new era for offshore wind?

In September, we wrote about the Contracts for Difference (CfD) Allocation Round 5 (AR5) and what this could mean for energy generators.

As a brief recap: AR5 hit the headlines for all the wrong reasons. While the government was keen to promote the fact that solar, onshore wind, tidal and geothermal projects were awarded funding, the main focus point was the absence of any offshore wind projects.

This meant that just 3.7 gigawatt (GW) of renewables capacity was successful - the lowest level since 2017 - compared to 10.8GW in last year’s auction.

The main reason given for this was the low price. At just £44 per megawatt hour (MWh), developers said that it was simply not viable for them to bid.

The good news is that the Department for Energy Security and Net Zero (DESNZ) has now announced its maximum strike price for Allocation Round 6 (AR6) next year¹. This will see:

• An increase of 66% for offshore wind projects, from £44/MWh to £73/MWh
• An increase of 52% for floating offshore wind projects, from £116/MWh to £176/MWh

It is also increasing maximum bid prices for other technologies, including:

• geothermal by 32%, from £119/MWh to £157/MWh
• solar by 30%, from £47/MWh to £61/MWh
• tidal by 29%, from £202/MWh to £261/MWh3

DESNZ says that this will ‘help ensure projects are sustainably priced and economically viable to compete in AR6’.

New proposals for the introduction of the ‘Sustainable Industry Reward’

As well as announcing increased strike prices, DESNZ also published proposals that will see it review applications from the 2025 auction, not just on their ability to deliver low cost renewable energy, but also on ‘how much a project strengthens the environmental and economic sustainability of the industry’.

These ‘non-price factors’ were the subject of a previous consultation (which we wrote about here) and are now called the ‘CfD Sustainable Industry Reward’ (CfD SIR). This is the subject of a new consultation that will close on 11 January 2024.

There are two parts to the consultation:

• Part 1 proposes a model to deliver the CfD SIR
• Part 2 proposes the type of factors that could be valued under the CfD SIR

The government says the CfD SIR could ‘provide greater revenue support to projects that take meaningful action to increase the economic, environmental and social sustainability of offshore and floating offshore wind deployment.’

What does this mean for independent energy generators?

Since its introduction in 2014, the CfD scheme has undoubtedly played a vital role in the deployment of renewable energy in the UK. It is fundamentally a good mechanism, but the issues highlighted during AR5 showed that change was needed.

Hopefully, the increased maximum strike prices, particularly for offshore wind, will be enough to get the growth of renewable energy back on track.

The consultation on the CfD SIR is also a further opportunity for generators to have their say on how renewable energy is deployed in the UK.

We believe that independent generators have a key role to play in the energy system of the future. By selling their power directly to corporate buyers via a Power Purchase Agreement (PPA) they can help to meet the demand for green energy and help relieve the pressure on the grid.

If you have any questions about this, or anything to do with energy generation, please contact our team.

1. CfD Administrative Strike Prices (£/MWh, in 2012 prices) - source DESNZ 2023