The UK has officially launched its fourth Contracts for Difference allocation round, opening up the country’s largest support package for renewable energy to date. With 12 GW of capacity set to be dominated by offshore wind, the country’s focus now needs to shift to streamlined development, and to raising its targets for deployment by 2030.
Opening to applications on Monday, the fourth round of the Contracts for Difference (CfD) scheme makes £285 million of annual funding available for three different ‘pots’ of renewable energy projects. According to the Department of Business Energy and Industrial Strategy (BEIS), the offshore wind capacity resulting from the funding alone could generate enough electricity to power nearly one-third of the country’s homes.
Announcing the scheme’s inauguration, BEIS Secretary Kwasi Kwarteng said “Our biggest ever renewables auction opening today will solidify the UK’s role as a world-leader in renewable electricity, while backing new, future-proof industries across the country to create new jobs.”
“By generating more renewable energy in the UK, we can ensure greater energy independence by moving away from volatile global fossil fuel prices, all while driving down the cost of new energy,” he added.
The CfD operates on the principle of certainty of energy pricing for a developer, which can be invaluable in the early stages of such emerging technologies with high upfront costs and long investment lifecycles. It protects both developers and consumers from paying support costs when electricity prices are high or volatile. Through the slump in demand under Covid-19 for example, European countries on average saw negative day-ahead power prices around 0.8% of the time during the first nine months of 2020 – a frequency nearly 4 times higher than seen between 2015 and 2018.
CfD contracts are allocated through a process where the lowest project bids are awarded contracts first within each technology group. This means that successive bids tend to get closer and closer to a parity position with fluid energy market prices. In the UK, the scheme’s competitive nature has seen the price of offshore wind fall by around 65%, hitting £40 per MWh in the last auction.
The contracts themselves are 15-year private law contracts between generators of renewable electricity and the state-owned Low Carbon Contracts Company (LCCC), which is managed at an arm’s length from the government itself. The fourth allocation round will close to applications on 14 January 2022, with the final results of the auction expected to be announced in mid 2022.
Offshore wind specifically, has been the largest beneficiary of the CfD scheme in the past. The first three rounds of auctions, as well as some bespoke deals, have awarded contracts covering around 13 GW of offshore wind capacity out of a total 16 GW across 58 renewable energy projects.
The 12 GW in the fourth round would account for more capacity than the first three rounds combined – 2.1 GW was awarded in the first, 3.3 GW in the second, and 5.8 GW in the third.
The largest of the ‘pots’ within the fourth round by far, receiving £200 million per year, is Pot 3 for offshore wind technologies, on which no capacity cap has been placed. The round aims to help satisfy the UK’s goal of installing 40 GW of offshore wind capacity by 2030.
Rethink Energy expects that around 6 GW of fixed-based offshore wind will be awarded contracts in the fourth round of auctions, while further capacity will also be awarded through the ScotWind auction for seabed leasing rights, which could amount to over 10 GW, with significant interest coming from many fossil fuel majors as part of their own transition.
BEIS also granted development consent for Vattenfall’s 1,800 MW Norfolk Boreas offshore wind farm this week, making it a frunner for funding in the upcoming CfD round.
The lead time between announcing a lease and an offshore wind entering operation in the UK is typically between 10 and 12 years, and with permitting delays impacting several project in early stages of development, the success of the UK’s 40 GW target will depend on how the UK improves its project approval rate and supply chain bottlenecks.
Indeed, following the first consultation on the fourth CfD round, the government has also announced that a second consultation is being launched on new proposals for the Supply Chain Plan, to increase the clarity, ambition and measurability of commitments made by renewable project developers when they bid for contracts in the CfD scheme, and to introduce new measures if they subsequently fail to deliver on those commitments.
The scheme will also help towards the target of having 1 GW of floating offshore wind installed by 2030, as set out in the Ten Point Plan for a Green Industrial Revolution. Floating wind will be categorized in the standalone ‘Pot 2’ category for emerging technologies, which also includes tidal stream, geothermal, and wave power – again with no capacity cap. Within the £75 million total budget for the category, £20 million is ringfenced for tidal stream projects, while £24 million is initially ringfenced for floating wind, with Ideol’s 1.4 GW project in Scotland as a likely candidate.
As announced back in March 2020, the CfD’s fourth round will also see subsidies reinstated for onshore wind and solar, following a decision in 2015 that aimed to protect consumers from higher electricity costs. Sitting within the ‘Pot 1’ category, the scheme also ups funding opportunities for hydro, landfill gas, sewage gas and energy-from-waste plus combined heat and power (CHP). With these ‘established technologies’ already at advanced stages of development, however, only £20 million of the total funding will be allocated to them.
The government has placed a 5 GW capacity cap on these technologies, with specific caps of 3.5 GW placed on wind and solar specifically. However, support could spur the development of over 800 “shovel-ready” onshore wind projects, with many having already gained planning approval.
In total, it is expected that over 23 GW of renewables projects, including 16 GW of wind power, will submit bids for CfD allocation – amounting to investments of over £20 billion. This being the case, it would be fantastic if the UK allowed the 12 GW cap to be lifted.
Of the 12 GW capacity, Rethink Energy predicts that at least 6 GW will go to fixed offshore wind projects, followed by 4.2 GW of onshore wind and 900 MW of solar power, while the rest will include pilots for floating wind and other alternative technologies.