BEIS announced on 2 March a consultation on wide-ranging changes to the Contract for Difference (CfD) scheme, including the re-integration of Pot 1 technologies. This is a significant change in the direction of renewables policy.
Our CEO Gareth Miller, who previously worked on designing and implementing the CfD contract in his time at DECC, gives his initial views on the announcement as well as the implications for future applicants, consumers and the scheme itself. Cornwall Insight will be providing further in-depth coverage on the announcement through our regulatory alerts, forums and Energy Spectrum issues.
After a prolonged period where mature technologies such as onshore wind and solar have been unable to participate in the CfD scheme, this consultation by BEIS heralds a material change in renewables generation policy.
The biggest news is actually not about the detail, but what it says about how energy policy is made—unarguable economic rationale and net zero necessity are factors that are finally taking precedence over short-term political considerations.
Perhaps there is also an acceptance of a reality that the current subsidy-free market is not yet able to deliver at scale. The proposed re-integration of onshore wind and solar PV, amongst other technologies in the “established” technology pot, is a tacit acceptance from the government of their essential role in the low-cost pathway to reach net zero. It implies a recognition that while a subsidy-free market will continue to develop across all maturing technologies, it is unlikely to be enough in a net zero world. This may reflect mixed appetite from debt providers for long term power price exposure, and bottle necks on bankable corporate or utility routes to market for subsidy-free developments being pursued in the UK today.
The offshore wind sector will also take comfort from the current proposals. Direct competition with onshore wind and solar under technology neutral auctions is not proposed. The consultation is clear that offshore wind will retain its position as a key scalable and strategic keystone of the net zero transition. As a result, the consultation proposes a separate “pot 3” for offshore wind, or a continuation of its status as a less established technology in “pot 2” where – given the recently achieved low prices in AR3 – it is likely to dominate. The extension of delivery-years out to 2030 will also be welcomed given the long lead -time on offshore wind development. The consultation also considers the potential to carve out floating offshore wind as a different technology, with the clear expectation of the role this technology might play in future capacity growth.
Some of the wider contractual and allocation changes will likely be welcomed by the sector. Notably, the efforts to try to simplify auction allocation and contractual milestones and to introduce flexibility in the way capacity constraints are applied in the auctions are bound to be viewed positively. However, suggestions such as introducing bid bonds in certain circumstances, building in greater teeth on supply chain plans for large projects, and the new negative pricing proposals will need more careful consideration by investors and developers alike.
On negative pricing, the consultation proposes that CfD payments for any contract awarded in the future would stop during any period of negative reference prices. To date, turning off difference payments has only applied after six consecutive hours. The new proposals will require close attention by developers as the risk now exists of much greater incidents of negative pricing in the future, depending on assumptions that are made on capacity mix and wind growth, as well as how existing wind assets are repowered. The risk these proposals create may encourage some upward pressure on bid prices, although competitive auctions and strike price caps applied by government may well limit the effect of this in achieved prices in reality.
To wrap-up, whilst a new chapter has been opened, there is much of the story still be written. For example, is no direct confirmation of support for Pot 1 technologies after AR4. Nor is there yet clarity on budget allocation, capacity constraints and administrative strike prices that will apply to re-integrated established technologies in AR4. It is only once such details are known that a proper assessment can be made of how much of the existing onshore wind and solar pipelines are likely to have a legitimate shot at securing CfDs. We think it is probable that AR4 auction parameters will be set in such a way that only the most efficient projects will be able to secure support as this has been the modus operandi of the CfD process thus far.
If so, the subsidy-free market will need to continue maturing and will still have to play an important role alongside CfD auctions to ensure net zero remains achievable. It will be interesting to see whether those pursuing subsidy-free developments already will continue or pause and wait for more detail on AR4 parameters.
It is true that there is still much work to be done to understand how risk will be taken and priced in non-CfD projects against the backdrop of our current wholesale market design, particularly for those looking to raise project finance debt. There are also valid questions emerging about whether the wholesale market is really appropriate in its current design in a world of growing volumes of heavily price-insulated generation under BEIS’ CfD scheme, even with the potential for more stringent CfD rules on negative pricing from AR4 onwards. These are complex questions that should not be rushed, and certainly are not for this consultation, but they should be moving up the industry agenda at some stage.
Assuming government won’t open up established auctions to the majority of the onshore wind and solar pipeline any time soon, and will continue to focus on supporting the most efficient projects, it is going to be really important that innovation and pioneering projects set some benchmarks in subsidy-free development. The scope therefore for innovation and pioneering approaches remains wide, and the need for such models undiminished. We are looking forward to working with our customers pursuing CfDs, or those looking at non-CfD routes to development in the coming months.