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21 November 2019

Denmark follows UK Contracts for Difference

Offshore pioneers are looking to each other for subsidy inspiration, with Denmark choosing to follow the approach used in the UK and Germany, with a Contract for Difference (CfD) mechanism selected for the Thor offshore wind park.

Wind Denmark announced last Friday that bids for the Thor offshore wind park will follow the CfD model, in a reverse auction process where developers are guaranteed a flat rate for electricity produced, regardless of the underlying market rate, which may be higher or lower. Initial intent to switch to this scheme was mentioned in 2017, with proposals to invest €174 million to fund offshore wind and solar. Now the Thor scheme will allocate €495 million to will cover the construction and connection of the wind park, with the CfD to be in place for a 20-year period.

This follows the CfD model that has started in the UK in October 2014 with its first round of auctions, which saw 2140 MW of capacity subsidized through the scheme. In 2017, The second round supported 3670 MW of capacity of Advanced Conversion Technologies, biomass and offshore wind, with the third auction round awarded to 5780 MW of projects this year.

The CfD operates on the principle of certainty of energy pricing for a developer, which can prove valuable in the early stages of an immature technology, such as offshore wind, while also protecting consumers from paying support costs when electricity prices are high. If the awarded bid price is above the market price, the state will be required to pay the difference, and if it is lower, the difference will be paid by the developer back to the state. This means that successive bids tend to get closer and closer to a parity position with fluid energy market prices.

Wind Denmark believes that this change in the system will yield lower prices, transferring risk to project owners if electricity prices rise due to unforeseen circumstances, while guaranteeing a solid price for energy produced, theoretically providing a predictable, and therefore, bankable level of income for CfD winners.

With Denmark and the UK sitting ahead in term of installed offshore wind capacity, the CfD model will inevitably be picked up by followers in Europe to support the development of offshore wind farms by providing a secure environment for developers.

Initially in the UK, major developers had issues with the CfD concept, but it has been largely acclaimed for bringing more bidders to renewables in the UK, and getting for successful auctions off the ground.