Commenting on Business Energy Industrial Strategy’s (BEIS) consultation on wide-ranging changes to the Contract for Difference (CfD) scheme announcement, Gareth Miller CEO of Cornwall Insight, said:
“After a six-year period where mature technologies such as onshore wind and solar have been unable to participate in the CfD scheme, this consultation by BEIS heralds a material change in renewables generation policy. Economic rationale and net zero necessity are finally taking precedence over political considerations, and that is obviously being well received across much of the industry.
“The proposed re-integration of onshore wind and solar PV, amongst other technologies in the “established” technology pot, is a tacit acceptance from the government that these projects will play an essential role in the low-cost pathway to reach net zero. Crucially, echoing well-evidenced arguments that we and others have been making, government accepts that whilst a subsidy-free market will continue to develop across all maturing technologies, it is unlikely to deliver the scale of capacity required to keep us on the net zero pathway.
“The offshore wind sector will also take comfort from the current proposals. Particularly that direct competition with onshore wind and solar PV is not proposed and that it retains a position as a key scalable and strategic keystone of the transition in the government’s eyes. The consultation proposes a separate “pot 3” for offshore wind, or a continuation of its status as a less established technology in “pot 2”. It also considers the potential to carve out floating offshore wind as a different technology, with clear expectation of the role this technology might play in future capacity growth.
“Some of the wider contractual and allocation changes will likely also be welcomed by the sector. Notably, the efforts to try to simplify auction allocation and contractual milestones and to introduce flexibility to capacity constraints in auctions are bound to be viewed positively. However, suggestions such as introducing bid bonds and if and how widely these would be applied, greater teeth on supply chain plans for large projects and new negative pricing proposals will be looked on more carefully.
“On negative pricing, the consultation proposes that CfD payments for any contract awarded in the future would stop during any period of negative reference prices, rather than only after six consecutive hours currently. This will require close attention by developers. Applicants will need to understand forecasts of future negative price incidents with our power price forecasts suggesting this is a risk that investors will seek to quantify. All other things being equal, the net impact of the change is likely to be higher strike price bids as a result of either lost payment expectation or costs of mitigation. Greater exposure to power prices may encourage developers to invest accordingly in flexible battery storage to mitigate these risks. Alternatively, developers could seek to build in a premium into their bids to cover the expected periodic absence of payments. Financing structures may also require some ring-fenced cash in the projects to cover off this risk.
“Ultimately though, the government should really be commended for the headline rehabilitation of established technologies and this will capture most of the headlines. Whilst this is a hugely positive step for the sector there are still questions as to how impactful these proposals will be on real capacity delivery. Whilst clarity on AR4 in 2021 is helpful, and extending delivery year deadlines to 2030 also provides greater certainty for the sector on the trajectory of new-build assets, there is no direct confirmation of support for Pot 1 technologies after AR4. Nor is there yet clarity on budget allocation, capacity constraints and administrative strike prices that will apply to re-integrated established technologies in AR4.
“It is only once such details are known that a proper assessment can be made of how much of the existing onshore wind and solar pipelines are likely to have a legitimate shot at securing CfDs, and what part of the cost curve will fare the best. We think it is probable that AR4 auction parameters will be set in such a way that only the most efficient projects will be able to secure support. If so, the subsidy-free market will need to continue maturing and will have to play an important role alongside CfD auctions to ensure net zero remains achievable. All horses will need to continue to run hard in this race.”