Contracts for Difference: Exemptions implemented and consultation launched

On 16 January 2018, Cornwall Insight issued its latest Contracts for Difference (CfD) Supplier Obligation (SO) report, forecasting the cost of the Total Supplier Obligation (TSO) for each delivery year until 2021-22. There are two major changes to the scheme recently announced that are now factored into our forecasting.

First, following confirmation of the exemption for Energy-Intensive Industries (EII), our central scenario reflects the lower demand base with the removal of consumption for this sector. Secondly, following the Supreme Court’s rejection of RSPB Scotland’s application to appeal the planning consents for Neart na Gaoithe, the offshore wind project is now included in our central scenario.

The inclusion of the 448MW Neart na Gaoithe project in our central scenario sees an uplift of £0.456/MWh to the TSO in 2021-22, based on the estimated commissioning date of 2021 according to developer, Mainstream Renewable Power.

In other developments since the last report in October, Phase 1 of the Walney offshore wind extension has commissioned (330MW). Six of the 14 projects awarded contracts via the Final Investment Decision for Enabling Renewables (FIDeR) process are now in operation with a cumulative capacity of 1.6GW.

Another FIDeR project expected to fully commission in the current quarter is the Lynemouth biomass conversion (420MW). REMIT data shows that the plants three units will undergo pre-commissioning tests and plan to be fully operational by mid-March.

Following the publication of the Clean Growth Strategy, BEIS has launched a consultation seeking views on proposed amendments to the scheme.

The consultation sets out a definition of remote islands wind as a new technology that can compete under the “less-established” technology category in future auctions. The proposed definition of a remote island is an island located in the territorial sea of the UK (other than the part adjacent to Northern Ireland) where all parts of its coastline are situated at least 10 kilometres from mainland GB. For a project to qualify as a remote island CfD unit it would have to: be located on a remote island, require at least 50km of cabling (of which 20km must be subsea), and be connected to the GB national transmission system or the distribution system.

In addition, refinements designed to ensure more efficient Advanced Conversion Technologies (ACT) and Combined Heat and Power (CHP) plants can compete for subsidy are included, as are updated greenhouse gas emissions criteria that new projects using solid and gaseous biomass must comply with.

The major change proposed in the consultation is to the definition of remote islands wind. With remote island and offshore wind potentially participating in the same future auctions, it is possible that windfarms could procure the entirety of capacity awarded in the next auction and push out other less-established technologies.

Whilst windfarms can provide a large amount of installed renewable capacity with seemingly ever decreasing costs there is a downside to windfarms dominating CfD auctions. The danger of large projects, such as offshore wind participating in CfD auctions was perhaps seen in Allocation Round 2, with only £176mn of the £290mn budget spent at peak. With fuelled technologies subject to a maxima of just 150MW, the result suggests that other windfarms bid into the auction but due to their size consequently breached the budget. If a project or flexible bid breaches the budget, it is rejected and if there are no other projects or flexible bids that can utilise the remaining budget without it being breached then the auction is forced to close without the full budget being utilised.

Another issue with high levels of installed wind capacity comes in the form of price cannibalisation. During times of high wind generation, the half-hourly reference price decreases, which translates into higher top-up payments to intermittent CfD generators, whose top-up payments are based on the half-hourly wholesale power price. With suppliers passing through the costs of the scheme, the burden of these higher payments ultimately falls on to the consumer.

With the consultation open until March 2018 and the next CfD auction provisionally planned for Spring 2019, it remains to be seen whether the proposed remote island wind definition will receive support and whether these projects will be able to participate alongside offshore wind and fuelled technologies in a Pot 2 “less-established” technologies auction.

Cornwall Insight’s quarterly forecast of CfD Supplier Obligation costs includes: a forecast of costs on a £/MWh basis, project news, and relevant consultations for suppliers and market developments. For more information on the report please contact l.drummee@cornwall-insight.com.

Related thinking

Low carbon generation

Learning curves and the many moving parts of the CfD Auctions

Learning curves are an important part of the toolbox of energy system modelling, representing the benefits of learning by doing and the economies of scale. The learning rate describes how as production doubles capacity cost reduces, so a learning rate of 15% would imply that as production doubles, costs would...

Energy Market Design

Are prices going to rise in Contracts for Difference Allocation Round 5?

A number of factors may be about to put an end to the trend for falling energy prices in the Contracts For Difference (CfD) scheme. The CfD scheme has provided strong subsidy support whilst also providing consumers robust levels of protection. High investor confidence and steady reductions in capital costs...

E-mobility and low carbon

2022’s most exciting ‘Charts of the Week’

Some of our team have looked back throughout 2022 and picked their most exciting ‘Chart of the Week’.​Their choices include exploring green tariffs, wholesale gas prices, CfD allocation round 4 and the MHHS Implementation Levy.  It’s My Birthday – Two years of Dynamic Containment Picked by Tom Faulkner, Head of...

Energy Market Design

Financing Net Zero: A (revenue) cap on UK merchant financing opportunities?

On 13 October 2022, we hosted the latest instalment of our ‘Financing Net Zero’ webinar series. The session, sponsored by Shoosmiths, focused on opportunities and challenges for merchant financed renewable projects amid the current wholesale price volatility.   In recent years, due to the increasing success-rate and profitability of renewable projects,...

Regulation and policy

Government to consult on the introduction of Cost-Plus-Revenue Limit

The government issued its Energy Prices Bill on 12 October. The bill will put in law a number of the already-announced mechanisms that will be used to support households and businesses this winter including the Energy Price Guarantee and the Energy Bill Relief Scheme. Also announced alongside this is the...

Energy storage and flexibility

From zero to hero: Can CfDs split markets and reduce costs this winter?

Given media comment on the imposition of a revenue cap for low carbon generators instead of migration of existing projects onto a CfD, please find below a blog published by Cornwall Insight three weeks ago. Not only did this note the possibility of the revenue cap being a fall back...

Energy Market Design

How does REMA impact energy generation, flexibility and consumers?

The Review of Electricity Market Arrangements (REMA) is the largest review programme of GB electricity market arrangements for a generation. It comes at a time when European energy markets are suffering extreme turmoil. Depending on the outcome there could be significant implications for generators, flexibility providers, and, indirectly, consumers. REMA...

Energy Market Design

REMA: electricity market design choices

Electricity markets will serve as the foundation for the future GB energy system.  This article examines some of the market design decisions that will be considered by the Review of Electricity Market Arrangements (REMA). Market design goals At its most simple, a well-functioning market will attract enough potential “buyers” and...