Winner takes it all? First CfD allocation results announced

United Kingdom

The first round of Contracts for Difference, (CfD) allocations were announced by the Department of Energy and Climate Change (DECC) yesterday, Thursday, 26 February 2014. This ushers in a new era of renewable technologies competing for support that is due to replace the current support system under the Renewables Obligation (RO) scheme and is a milestone in the UK Government’s flagship Electricity Market Reform (EMR) programme. The EMR programme was instituted by the Energy Act 2013 and is a result of extensive work by the Government and industry.

Of the 27 contracts awarded, the majority has been awarded to the more established renewable technologies such as onshore wind farms (15 projects) and solar developments (5 projects). Yet, based on this CfD allocation award, the technology which the Government will be relying on to provide renewable electricity in the years to come is primarily offshore wind (as shown in the diagram below). The majority (58%) of the MW expected to be installed will be offshore wind technologies, followed by onshore wind.

ealert image

While the Government and some in industry hail the auction a success, this auction result is a step change for the UK renewables industry. Competitive tension has brought with it not only the pressures on price but defining the rights and obligations of the generator in a written contract (in contrast to the RO) has given greater clarity of the terms on which the Government is willing to offer its support. Still, the CfD is a lengthy and complex document which as yet remains untested in practice.

As part of the CfD terms, the Government will hold generators to the obligation to build out the required capacity. Failing to do so will come with penalties of not only losing the CfD but also a 13 month exclusion period (via the “non-delivery disincentive”).

This new world will of course be closely watched by stakeholders with projects in earlier stages of development and by those who were not successful in the current allocation round.

In particular, solar projects were significantly pushed down on price (from the £120/MWh administrative strike price to as low as £50/MWh) and, if there is significant non-delivery, questions will be asked about whether the driver to secure a CfD drove projects to a cleared price below that sufficient to ensure the necessary rates of return to keep the projects viable.

In addition, for biomass projects the question of State aid approval hangs in the balance. Of the three biomass investment contracts (early form of CfD), one has been approved by the European Commission. Two are still waiting and earlier this month, the European Commission launched its investigation into the investment contract for Lynemouth power plant. Any condition that the European Commission may impose may have relevance for biomass contracts awarded through CfD allocation rounds.

The CfD allocation award also comes ahead of the Implementation of Electricity Market Reform report due to be published by the Energy and Climate Change Committee on 4 March 2015. This report will evaluate the success of EMR in achieving the Government’s aims of decarbonising the UK electricity sector while ensuring value for money for consumers.

The full list of the projects that were awarded a CfD in the first allocation round is available here.

For the Energy and Climate Change Committee inquiry into the Implementation of Electricity Market Reform, please click here.