Today, the government released the results for the fourth round of the Contracts for Difference (CfD) scheme, securing a record 11GW’s of renewable capacity across 93 projects, nearly double the 5.8GW awarded in the 2019 Allocation Round 3.
The greatest capacity – almost 7GW – has been secured from new offshore wind projects, which compete within their own ringfenced pot of money (Pot 3). This compares to 5.5GW secured in AR3. Onshore wind secured almost 0.9GW of new capacity, while solar PV secured 2.2GW of contracts, with both technologies apparently being limited by their budgets rather than their 3.5GW capacity maximum.
The fourth round also saw developing technologies (Pot 2) tidal stream and floating offshore wind projects successful for the first time, with tidal stream returning a capacity of 41MW and floating offshore wind returning 32MW, supported by a minimum funding commitment by BEIS.
The auction saw slightly lower prices achieved for offshore wind projects compared to the last auction in 2019. Offshore wind cleared at £37.35/MWh (2012 prices), compared to a low of £39.65/MWh in AR3. Solar PV sites cleared at £45.99/MWh, 42% under prices achieved in AR1, while onshore wind cleared at £42.47/MWh, 47% under AR1 prices.
Gareth Miller, CEO at Cornwall Insight said:
“As consumer bills rise to unprecedented levels, these results show the value that renewables can play in driving down the cost of power generation, decoupling electricity bills from gas prices, and all in an environment currently where high gas prices are setting the electricity price in the market. The fourth CfD round auction represents the greatest amount of renewable capacity secured in a GB auction to date and will help to further the ambition to decarbonise the power sector as we head towards 2035, as well as support the country in achieving its net zero targets by 2050.
“The auction not only secured capacity in seasoned renewable technologies, including a record level for offshore wind projects, but it cemented the UK as a leader in cutting edge renewable technologies with tidal stream and floating wind projects returning capacity for the first time.
“In the face of an increasingly volatile economic environment and with ongoing supply chain challenges, it is striking to see the confidence the industry has shown in continuing to deliver renewables at relatively low cost. Indeed, while the current results show £242mn of the budget was used, £53bn below the budget, this assessment was based on wholesale market forecasts set prior to the current energy crisis, and the actual consumer spend to these sites is likely to be much lower, or even negative at times, as CfD holders will be required to payback sums under the contract at times of high wholesale power prices. Initial modelling from Cornwall Insight’s Benchmark Power Curve shows that the CfDs just awarded may save the consumer £1.5 billion per year by the end of the decade. Of course, that is highly dependent on prevailing views of wholesale prices.
“However, there are also rather new risks here compared to previous CfD auctions between the point when the contract is awarded and the project delivery, with the extent of exposure for individual projects dependent on how fixed their financing and contracting costs are. An uncertain economic outlook carries risk of increased costs of financing, and turbine suppliers and other service and equipment providers are generally under financial pressure from rising input costs and pre-existing tight margins, placing pressure on banks and the supply chain to raise prices. The pathway to commissioning without changes to a project’s cost base is probably trickier than ever, unless financing and contractual terms were fixed prior to bidding into the auction.
“Further, while we saw nearly 11GW of renewables secure agreements in CfD AR4, a large pipeline of assets either failed to secure a contract, did not enter, or were not ready to enter, and remain without a route to market to deploy. Onshore wind and solar PV technologies in particular, likely saw a large surplus of assets in the auction. It may be a record level of capacity, but with stretching renewable targets much further deployment is still required. Until the next allocation round in 2023, the remaining significant pipeline of projects may now be looking to alternative routes to market. With wholesale prices high then it will be tempting to explore merchant options, although we should note that with long term infrastructure exposed to 20-25 year pay back periods, when it comes to volatile commodity driven revenue streams the old adage applies – what goes up can also go down.”
–Ends
Notes to Editors
For more information, please contact: Verity Sinclair at v.sinclair@cornwall-insight.com
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About the Cornwall Insight Group
Cornwall Insight is the pre-eminent provider of research, analysis, consulting and training to businesses and stakeholders engaged in the Australian, Great British, and Irish energy markets. To support our customers, we leverage a powerful combination of analytical capability, a detailed appreciation of regulation codes and policy frameworks, and a practical understanding of how markets function.
