With the announcement last week of the key dates for CfD Allocation Round 4 (AR4), our head of Assets and Infrastructure James Brabben looks at what lies ahead for prospective bidders.
So, we have the dates for AR4…nearly! Whilst most of the key dates have been provided, there is still the small matter of the Draft Budget Notice and Draft Allocation Framework to be released. These are expected over August and September and will give a clearer view of how much budget and MW capacity will be awarded to each pot, as well as the extent of any minima or maxima set for eligible technologies. As a result, we can’t yet take a deep-dive into the expected strategies, competition or likely outcomes of the auction. However, the dates do provide most other important information for prospective bidders.
Key to this is the “cut-off” date for the application window, which will run 13 December 2021 to 14 January 2022. This feels like a critical date for many new build sites, as by 13 December any prospective bidder will need all aspects of CfD eligibility approved (notably planning permission and grid connection). This December date is significant as, compared with initial views in the sector and previous government statements, it is later than anticipated. A “2021 auction”, as much of the industry expected, is now practically in the spring of 2022 once the eligibility window closes. As a result, it is likely that more pipeline projects will become eligible by December to compete, with the effect of making the auction more competitive should projects enter.
We have been tracking this new build pipeline through our Renewables Pipeline Tracker over the past 18 months, finding that both the onshore wind and solar pipeline has been growing considerably. We now calculate a CfD eligible solar pipeline of ~3GW, up by ~1.8GW on the same time 12 months ago. CfD eligible onshore wind capacity is at ~5GW, up by ~1GW. We also calculate at least a further ~6GW of solar PV is in the grid connection queue and not yet in planning. With around 4 months to go until eligibility deadlines, a rush solar PV planning approvals could yet increase the pipeline further.
By December, we could therefore have a record level of new build renewables looking to bid into the CfD round, creating some interesting questions for new build plant including:
- If CfD AR4 is going to be ultra-competitive, is this the right route to market? Whilst being the most bankable route to market option, the CfD does cap upside for projects and also looks to procure the cheapest £/MWh projects. Some projects, depending on budget and MW cap parameters in the auction, may deem it unlikely for them to be competitive and look to alternative route to market options such as utility PPAs or Corporate PPAs (CPPAs)
- What happens to a project pre and post CfD? The CfD is a 15-year contract, with the delivery years for AR4 likely to be in the middle of the decade. For projects able to come on before CfD delivery years, they may need to think about a short-term merchant PPA agreement before the CfD contract starts. Projects must also consider the shelf-life of a project after the CfD and if revenues can be forecast and assessed for these periods. Factoring in pre and post CfD revenues could therefore influence auction bid strategy and will depend on the maturity and expected operational dates of bidding projects
- Are their wider revenues that can be incorporated into a project to make it more competitive? With a competitive auction expected, some generators may look to find an edge by incorporating other revenues. The Capacity Market is prohibited as part of eligibility criteria for the CfD (they cannot be combined as revenues), but other revenues are available through balancing services markets. Generators may also look to incorporate co-located batteries to enhance these balancing revenues or limit the impacts of negative pricing, which under the revised CfD AR4 contract has been amended to curtail top-up at any market price below £0/MWh. Unfortunately, co-location under the CfD is still a relatively unknown area and with an ultra-competitive auction co-located projects will have to assess the CfD against alternative business models where balancing services and Capacity Market revenues could more easily be incorporated
Whilst we paint a picture here of alternatives being available to new build generators, ultimately these options are still challenging and the bankability of the CfD contract is likely to incentivise solar and onshore wind generators to bid into the AR4 process. The lack of costs or bid bonds in AR4 participation would also support this view, with generators seeing the auction as a “free hit” to enter and find out if prices materialise at a level suitable for their project returns. We therefore expect very high levels of auction competition, and a potential stalling in the development of other route to market options such as utility PPAs and CPPAs if generators crowd the CfD and only look at alternatives post-auction in spring/summer 2022.
The final extent of CfD competition will therefore be determined by each project owners view of potential CfD auction prices, the risks and rewards of alternative routes to market and how flexible they can be on project delivery in the context of CfD delivery years.
To find out more about our CfD services, including auction forecasts, contractual support and how our Renewables Pipeline Tracker can help you assess CfD auction competition, please contact Tim Dixon (t.dixon@cornwall-insight.com) or Dan Starman (d.starman@cornwall-insight.com).
