We argue that changes to the CfD regime should be closely examined to address several limitations in the targets, timings and integration of the auctions with the wider energy system and market landscape:
- The current approach does not ensure that CfD procurement meets the UK’s decarbonisation trajectory;
- Investors do not have long-term certainty about the timing and likely demand in the CfD auction;
- A budget-based procurement approach does not work as an effective cost control mechanism, as its ability to do so is undermined by subsequent wholesale price movements; and
- There is virtually no perceptible integration between the CfD and CM procurement exercises.
It is our contention that CfDs should be procured against a TWh volume target or ‘decarbonisation standard’ with annual auctions for a delivery year taking place ahead of Capacity Market auctions. This paper sets out why.