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Contracts for Difference allocation round auctions announcement: a clear pipeline(for offshore wind)

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Summary: Government announces biennial allocation round auctions to cover eligible renewable energy generation projects commissioning throughout the 2020s. Offshore Wind technology likely to dominate.

The Announcement

On 23rd July 2018 the Department for Business, Energy and Industrial Strategy (BEIS) announced that the next auction round for allocation of Contracts for Difference for eligible renewable energy generation would open in May 2019. In addition, BEIS announced that further allocation rounds would be held every two years starting from 2021.

Allocation Rounds

The Contracts for Difference (CfD) regime provides that a successful bidder (bidding for a specific project) in an allocation auction obtains a contract (the CfD) providing for a fixed price for energy generated by that project, mitigating electricity price risk to the project. Where the average market price (the “reference price”) is lower than the fixed price level, the reference price is topped up to the fixed price, and conversely paid back if the fixed price is lower than the reference price.

With £176 million allocated during the second allocation round (in 2017), and £557 million in committed funding remaining, it would provisionally be reasonable to expect that there will be auctions in 2019, 2021, 2023 and (potentially) 2025, though how far the committed funding will stretch, and whether any further funds will be committed, remains to be seen.

Eligible Technologies

To date, the indication is that the forthcoming allocation rounds will cover ‘Pot 2’ technologies only. This ‘less established technologies’ pot includes: offshore wind; onshore wind in remote islands (having been added to the pot after recent changes); dedicated biomass with CHP (combined heat and power); ACT (advanced conversion technology, for example gasification and pyrolysis); anaerobic digestion; geothermal; wave and tidal stream.

Our view is that, with both dedicated biomass with CHP and ACT arguably likely to be subject to more stringent efficiency eligibility criteria for the forthcoming allocation rounds, this may make these technologies less price competitive at auction. Conversely it is likely that the cost of offshore wind will continue to fall. In the last allocation round offshore wind accounted for over 95% of projects awarded a CfD (by generation capacity, totalling circa 3.2GW). This domination seems set to continue.

Unless a minima is announced for future allocation rounds (which is likely to be subject to significant advances in these technologies), there does not seem to be much, if any, likelihood that geothermal, wave or tidal stream will be awarded a CfD.

Conversely, there has been no indication that more established, ‘Pot 1’ technologies will be eligible for future allocation rounds. Whilst Sir John Armitt, chairman of the National Infrastructure Commission has, amongst others, called for support to be extended to onshore wind and solar, there has to date been no indication that this extension will be forthcoming.

A Clear Pipeline

The clear subsidy pipeline provided by BEIS should, and judging by the immediate commentary from the likes of Ørsted and Vattenfall will, create a secure investment background (including for the 8GW of offshore projects that already have consent from The Crown Estate).

This announcement should be welcomed as a strong step towards meeting the targets set by the government’s Clean Growth Strategy.

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