Contracts for Difference Second Allocation Round

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Summary: The Department for Business, Energy and Industrial Strategy (BEIS) delivered a long awaited energy market update on 9 November which focused on two principal areas: the second Contracts for Difference (CfD) Auction; and the announcement of the phase-out of unabated coal fired electricity generation. Key takeaways from that update are set out below.

No retrospective subsidy cuts in this Parliament

First up, BEIS re-affirmed its commitment to spend £730m of annual support on renewable electricity projects over the course of this Parliament –  Good news for holders of existing CfD, ROC and FiT-backed projects.

CfD Allocation Round 2 – Draft Budget Notice

After a two year auction hiatus, BEIS provided clarity to the renewables sector by releasing a draft budget notice for a second CfD Allocation Round, allocating £290m for “less established technologies” to be delivered in each of 2021/2022 and 2022/2023.  

The draft Budget Notice breaks this down by eligible technology and applicable Administrative Strike Price as follows:

TECHNOLOGY 2021/22 2022/23
Offshore Wind 105 100
Advanced Conversion Technology (with or without CHP) 125 115
Anaerobic Digestion (with or without CHP) (>5MW) 140 135
Dedicated Biomass with CHP 115 115
Wave 310 300
Tidal Stream 300 295
Geothermal  -   - 

 

This allocation will come as no surprise to developers, funders, investors and contractors but is bad news for those technologies dropped from the team-sheet since the first CfD Allocation Round, namely:

  • Biomass Conversion
  • Energy from Waste (with CHP)
  • Hydro (> 5MW < 50 MW)
  • Landfill Gas, Sewage Gas
  • Onshore Wind
  • Solar PV

There may still be hope long term for fuelled technologies not included in the second CfD Allocation Round, as BEIS opened up a consultation to assess suitable administrative strike prices for future auctions. The consultation also called for evidence regarding the cost of geothermal power which will inform the setting of its strike price in the second CfD Allocation Round.

Meanwhile a consultation opened for non-mainland GB onshore wind projects to consider whether they should be treated differently from onshore wind projects – but there was no confirmation as to eligibility for future CfD rounds, even if the answer is yes.

CfD -  Round 2 Allocation Process

Minima

No Minima will apply to any technology and a cumulative maxima of 150 MW will apply to fuelled technologies (Dedicated Biomass with CHP, Advanced Conversion Technologies and Anaerobic Digestion).

This will present an uphill struggle for marine technologies, but a competitive opportunity for offshore wind developers - whose cost base continues to decline - to dominate the auction (take for example Vattenfalls’ recent Danish offshore auction success at a bid price of €49.90 per MWh).

Strike Prices & Reference Prices

Strike Prices are published in £ 2012 values, to be inflated by CPI, with no indication yet as to the applicable reference price.

Timing

The second CfD Allocation Round will “open” in April 2017 and a final budget notice will be issued no later than 10 working days prior to the commencement of the Allocation Round.

Flexible gas trumps unabated coal

Gas fired electricity generation also now seems firmly back in favour as BEIS expanded on plans first discussed November last year to phase out existing electricity generation from “unabated” coal by 2025 – and replace such generation with gas.

In terms of the phase out, the key point from (i) a carbon reduction perspective and (ii) delivering the right investment signal for CCGT, is how “unabated” is defined – and whether this means bringing emissions down to a level the equivalent of a “cleaner” energy source such as gas fired generation, or zero.

This is a clear signal that gas is the Governments’ bridging fuel of choice to a lower carbon future which, complemented by new nuclear and offshore wind, BEIS hopes will drive the key energy policy aims of energy security, carbon reduction and low consumer bills.

Ignoring the cost issues with new nuclear and the low carbon transition tag attached to gas, key from an energy security perspective is to ensure new gas generators come online before coal fired plants close (or get retrofitted).

Quite how quickly this market signal will be acted upon by CCGT investors - in a low price environment - remains to be seen.

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