Contracts for Difference: a blow for offshore wind power, but could change be on the horizon?

The Department for Energy Security and Net Zero (DESNZ) recently announced the results of its latest Contracts for Difference (CfD) auction. While the government was keen to stress that solar, onshore wind, tidal and geothermal projects were awarded funding, the main headline was the absence of any offshore wind projects.

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

Offshore wind is a key element of the government’s energy security and net zero strategies, and it has set a target of hitting 50GW by 2030. However, according to RenewableUK, only 27GW has been secured so far, and it estimates that future auctions will now have to support 4.5GW to 5.8GW a year to get back on target.

What is behind the lack of offshore wind in this latest auction round?
Developers have said that the price floor was too low at just £44 per megawatt hour (MWh), and argued that the process had failed to take into account their increased costs for developing projects. As a result, they said that it was simply not viable for them to bid. 

This has understandably led to concern around the UK’s attractiveness to invest in renewable projects, as well as what this could mean for our energy security and net zero ambitions. It has also led many to question whether the flagship CfD scheme is fit for purpose in today’s environment.

Is change to CfD on its way?
However, at the same time, the government published its response to a consultation it launched earlier this year, where it outlined major reforms to CfD, asking for views on whether additional ‘non-price’ factors should be taken into consideration. It said this will help drive further investment in renewable energy deployment and improve energy security. We wrote at the time about what this could mean for energy generators.

These non-price factors could include:

• Supply chain sustainability
• Generation capacity building
• Innovation addressing skills gaps
• Enabling system flexibility and operability

The government response, which can be read in full here, published views on several ways that the introduction of non-price factors could work.

The most popular was a ‘top up’ model, where auctions would be run exactly as they are now, with no change to the bidding process. After the auction has been run, projects that made it through, and that submit and implement high-scoring non-price factors, could receive a top up to their CfD.

While the majority of respondents supported this approach, as it keeps things simple (other proposals, including a ‘bid re-ranking’ model and an option that amended the valuation formula, were deemed too complex), there were concerns that the CfD auction itself would still run on a price-only basis and top ups would only applied to the winners, meaning that non-price factors could become an optional “nice to have”.

DESNZ has now said it “will take into account the points outlined and use them to decide next steps on this policy”. 

What does this mean for owners and operators of energy generation assets?
What this latest news has shown us is that the CfD has to ‘move with the times’ if it is to remain a viable mechanism for encouraging the development of more renewable energy in the UK.

We know that any changes to the CfD scheme will be of interest to those that already own or operate, or are considering developing, low-carbon energy projects in the UK. We also know that increasing demand for clean power from end-user businesses, as well as consumers, is driving the need for more renewable capacity, and that this demand is currently outstripping supply.

For independent generators, this is a real opportunity to bridge the gap by selling their power directly to businesses.

We offer a range of Power Purchase Agreements (PPAs) for energy generators to sell their power to corporate energy buyers. If you have any questions about this, or anything to do with energy generation, please contact our team.