Record low clearing prices in Contract for Difference Allocation Round 3

Record low clearing prices in Contracts for Difference (CfD) Allocation Round 3 indicate the continued and rapid cost reductions for offshore wind resulting from competitive auctions.

Prices below £40/MWh (in 2011-12 money) are extremely low in the context of previous auctions. Even when converted to 2018 money, these equate to £45.3/MWh in 2023-24 and £47.5/MWh in 2024-25. This is still within the range of today’s baseload market prices currently trading at £45/MWh to £55/MWh. The prices are comparable with European offshore wind price benchmarks even though in GB, developers face additional risks and costs in project development and connection. The rapid fall in cleared prices for offshore wind since the first CfD allocation round is profound, amounting to a 66% reduction in less than five years. Whatever way you look at it, this is a landmark moment.

However, the captured wholesale price of wind technologies will fall as more projects come online. This will lead to very low wholesale prices at times of modest system demand in future. By 2023-24, this cannibalisation effect will have grown and our analysis shows that regular levy payments may be still be needed for these wind projects during the life of their CfD contracts. So, while it is right to say these contracts represent an outstanding deal for consumers, they are not necessarily guaranteed to be cost-free just yet.

It isn’t all about offshore wind. For the first time, Remote Island Wind (RIW) projects were awarded contracts across Orkney, Lewis and Stornoway. This means that onshore wind contracts have been awarded CfDs for the first time since the original CfD allocation round. The journey of remote island wind projects to winning CfDs has not been easy. Each project will have had to take account of the costs of grid connection and timing of planned island transmission links in their bidding, as well associated network charges. Results show that for projects awarded on Lewis and Orkney, the capacity levels are below the threshold set by Ofgem to trigger new transmission links for both islands.

The results reveal some clues about the auction dynamics. As the auction is pay-as-clear, we can say with confidence that some successful projects would have bid below the cleared prices. However, as bidding remains confidential, we won’t ever know for sure who, or by how much. The 6GW capacity cap introduced by BEIS for the auction was the constraint, rather than the budget. The capacity clearing level at 5.7GW suggests that a large-scale project above 300MW breached the 6GW cap and forced the auction to clear. Again, we don’t know for sure which project but given the scale, it was likely to be an offshore wind project, or a large remote island wind project.

While some developers will be absolutely ecstatic, spare a thought for those without a contract. There is more than 2GWs of offshore capacity that we think applied but missed out. The question will be whether this rolls forward to provide immediate competitive tension in the next CfD round anticipated in 2021.

The striking results create a number of follow-on questions for the sector and successful applicants. The first will be to follow the outcome of the Banks Group JR on the exclusion of onshore wind from this round, and its impact on CfDs just awarded. Secondly, assuming all winners sign their CfDs, all eyes will be on whether projects achieve their Milestone Delivery Dates. Thirdly, the government may want to consider if the grouping of technologies in future auctions should be reviewed. And finally, at these prices, BEIS may need to reconsider the balance of technologies and the ultimate system design they believe is appropriate to meet net zero. Many in the industry would argue, if renewables are this cheap, we should be building as much of it as possible.

Related thinking

Business supply and services

Improvements for microbusinesses in the market begin to take effect

Before energy prices began to really soar, in March this year we saw the final package of reforms following the Microbusiness Strategic Review from Ofgem. The outcome of the review was to introduce changes to supplier licence conditions that would improve how microbusinesses are treated in the market. The new...

Low carbon generation

RESS 3 consultation: DECC is listening, but the true test will be in the detail of the solutions incorporated 

The Department of the Environment, Climate and Communications (DECC) published the consultation for the third round of the Renewable Electricity Support Scheme (RESS 3) on 28 October 2022. Some of the issues drawn out in the consultation is a testimony that DECC has its ears on the ground and is...

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

Energy Price Guarantee to end in April

I was not surprised by the announcement from the Chancellor today (17/10) regarding the shortened time period in which the domestic Energy Price Guarantee (EPG) will apply, for all the reasons discussed in our report -  Energy Price Guarantee - Counting the Cost - and my accompanying blog. Our report...

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...

Regulation and policy

New customer support schemes will need very careful management

1 October 2022, marked a momentous day for the British retail energy markets, indeed for the nation as a whole. On that Saturday the Energy Price Guarantee (EPG) commenced for household customers and the Energy Bill Reduction Scheme (EBRS) for businesses. Not since March 1990 have ministers had so much...

Regulation and policy

One-hit wonder? Assessing the government’s business support scheme

Subsidising the unprecedented cost of energy for both households and businesses came in at the forefront of the Chancellor of the Exchequer, Kwasi Kwarteng’s “mini-budget” last Friday. Described as “one of the biggest interventions ever made”, Kwarteng confirmed a three-step plan. Firstly, as announced on 8 September, the introduction of...