The UK government has greenlit a series of rule modifications for the upcoming Allocation Round 7 (AR7) auction round for the Contracts for Difference (CfD) scheme.
A consultation on proposed rule changes ran between February and March of this year. Feedback from this informed the final changes made to the CfD scheme ahead of the auction round, which is set to start later this year.
Two-decade CfD contracts will “boost attractiveness” for investors
Among the most significant changes is the increase in contract lengths for new CfD contracts from 15 to 20 years for offshore wind (both floating and fixed-bottom), onshore wind, and solar proposals. This has drawn broad support from the renewable energy industry, with RenewableUK’s policy manager Nick Hibberd stating that the contract length increase will “boost the attractiveness of new UK projects at a time of intense international competition for private investment”.
Solar Energy UK agreed, calling the change “a pivotal step forward for the sector” and adding that “the policy will reduce the cost of capital, reduce exposure to market price risks and better align the UK’s support mechanisms with the long operational lifetimes of solar assets.”
Energy UK’s chief executive, Dhara Vyas also noted: “It’s good to see the scheme evolving to meet the current challenges and attract the investment necessary. Investor confidence not only reduces project costs, it also encourages more projects to bid, further increasing the competitive pressure which can reduce prices further.”
Analysis by LCP Delta suggests that extending CfD contract lengths for offshore wind to 20 years could reduce the budget needed for AR7 by over 10% as a result of lower clearing prices.
Eligibility expansions for the wind energy sector
Additionally, the reforms have immensely expanded the volume and types of wind energy projects eligible for entry into the auction round.
Eligibility requirements for fixed-bottom offshore wind projects have been relaxed to allow these projects to apply for a CfD while awaiting full planning consent, provided that their application for a Development Consent Order (DCO) has been accepted for examination by the Planning Inspectorate, and a full 12 months have passed since the DCO application was accepted for examination.
The government states that the primary reason for this change is to open up the auction to more projects, thus “improving competitive tension”. RenewableUK notes that this change means that 20GW of offshore wind is now eligible to bid in AR7, more than the UK’s entire current offshore wind capacity of just under 16GW.
Furthermore, repowered onshore wind projects will now be eligible to access CfD support in AR7.
More support for floating offshore wind
Several of the policy changes directly support the growth of the floating offshore wind sector. One such change is an amendment to extend phasing—in which large projects can be developed and constructed in as many as three separate phases, each of which qualifies for its own CfD agreement—to floating offshore wind projects.
More significantly, Test & Demonstration scale floating offshore wind projects- that is, smaller-scale, early-stage developments – will be able to enter AR7. The government states that floating offshore wind could prove vitally important in delivering the UK’s statutory decarbonisation obligations, adding: “To support this, it is important to provide a route to market for innovative Test & Demonstration scale projects, to provide learnings and support cost reduction of this nascent technology ahead of commercial scale deployment”.
RenewableUK policy manager Nick Hibberd noted that this is a welcome actioning of industry recommendations to “kickstart floating wind at scale”, calling the inclusion of test and development stage floating offshore wind projects in the upcoming auction round “a crucial step forward which will enable the UK to remain a global leader in this innovative technology”.
Budget changes
Finally, changes to the way in which budgets are set and published will be introduced in the August AR7 round. For fixed-bottom offshore wind projects, the budget will be published before the sealed bid window, and energy secretary Ed Miliband will be allowed to see developer bids that breach the initial proposed budget ahead of setting the final budget. The government states that this will deliver more certainty on how much generation capacity is procured in order to support what it hopes is an “ambitious” auction round.
This change has also been met with broad industry support, with RenewableUK stating that this “will mitigate the risk of significant budget underspend we have seen in previous years and ensure we maximise the deployment of high quality renewable energy projects in this auction.”
Jess Ralston, energy analyst at the Energy and Climate Intelligence Unit (ECIU), agreed, adding: “Changing the way the artificial ‘budget’ is set will likely mean that more British wind and solar is generated once it’s built, stabilising bills as the generators receive a fixed price.”
However, some are urging the government to ensure that it sets a significant budget target in order to procure enough renewable energy to meet Clean Power 2030 targets. Nick Civetta, senior advisory associate at Aurora Energy Research notes: “Without a published capacity ambition, offshore developer hopes for a big auction rest on the government setting a budget target that is aligned with CP2030 capacity goals.”
Commenting on the reforms, energy secretary Ed Miliband said: “We need to go further and faster to make Britain a clean energy superpower, end our reliance on volatile global gas prices and make working people better off with homegrown power we control. These reforms will give developers the certainty they need to build in Britain, helping deliver more clean power projects and supporting thousands of jobs.”
A recent Solar Power Portal blog explored the impact of the Labour government one year into its term—read it here.
