UK Government announces latest round of the Contracts for Difference Scheme

United Kingdom

The Department for Business, Energy and Industrial Strategy (“BEIS”) has formally announced the Fourth Allocation Round (“AR4”) of the Contracts for Difference (“CfD”) scheme, which is to open in December 2021.

AR4 provides for an additional £265 million per year of UK government support for renewable power generation, and aims to secure circa 12 GW of new capacity (roughly double the capacity of renewables that was secured under the previous Allocation Round (“AR3”)) and expand the number of technologies supported by the scheme.

While the date of the award of CfDs is not fixed, previous allocation rounds have taken around 4-5 months, which implies an expected date of April/May 2022 for contract award under AR4. The years in which successful projects must estimate they will commission (the “delivery years”) have not yet been confirmed but the relevant draft notice that has been issued suggests that established technologies like onshore wind and solar PV will need to expect to commission between April 2023 and March 2025 and other eligible technologies (including fixed bottom offshore wind, floating offshore wind and remote island wind) will need to expect to commission between April 2025 and March 2027.

Key elements of AR4

BEIS has previously confirmed some key changes to AR4, building on its experience of previous allocation rounds and subsequent consultation with industry. A summary of these changes is as follows:

  1. The removal of the overall cap on new renewables capacity covered by the previous allocation round.

  2. Separating floating and fixed bottom offshore wind, with floating offshore wind given its own ringfenced budget for CfDs.

  3. Negative pricing is extended for future CfDs, to ensure difference payments are not made to generators when the Intermittent Market Reference Price is negative.

  4. The Milestone Delivery Date is extended, from 12 to 18 months.

  5. Coal-to-biomass conversions are excluded from AR4 and future CfD allocation rounds.

  6. The Supply Chain Plan process for CfD projects of 300MW and above is strengthened.

Additional commentary from CMS on the key elements of AR4 is available here, and the key documents published by BEIS in relation to AR4 are available on its CfD Portal here.

Pot structure

The pot structure for AR4 has been amended to re-incorporate (after a lengthy hiatus) established technologies into the CfD scheme, and also to create a ringfenced budget for floating offshore wind. The amended pots will be as follows:

Pot 1

Capacity cap

AR4 budget

AR3 budget

Established technologies

  • Onshore wind (>5MW)
  • Solar Photovoltaic (“PV”) (>5MW)
  • Energy from Waste with CHP
  • Hydro (>5MW and 5MW)
  • Landfill Gas
  • Sewage Gas

5GW (including a 3.5GW limit for each of onshore wind and PV)

£10 million

None

Pot 2

Capacity cap

AR4 budget

AR3 budget

Less established technologies

  • Advanced Conversion Technologies (“ACT”)
  • Anaerobic Digestion (“AD”) (>5MW)
  • Dedicated biomass with CHP
  • Geothermal
  • Remote island wind (>5MW)
  • Tidal stream
  • Wave

None

£31 million (£55 million less floating offshore wind ringfenced amount)

£65 million

  • Floating offshore wind

£24 million (ringfenced)

Pot 3

Capacity cap

AR4 budget

AR3 budget

Offshore wind

  • Offshore wind

None

£200 million

No budget used due to 6 GW capacity cap

 

What’s next?

BEIS has yet to confirm full details of the exact opening date of AR4, specifying only December 2021. A final version of both the Budget Notice and the Allocation Framework (formal documents issued under statute, setting out some of the key parameters for an allocation round) is expected in November 2021, prior to the opening of AR4.

Comment

The re-introduction of Pot 1, and most notably onshore wind and PV, to AR4 is welcome and was widely trailed in light of the Banks judicial review arguments raised in AR3. There is however the question of whether developers will return to onshore wind and solar project in the same numbers as seen before given the relatively modest ‘pot’ (and associated low strike prices) and that many such projects have proceeded on a merchant basis to date. Shovel-ready projects will certainly be the greatest beneficiaries of this news, however for newer projects, land availability, planning constraints and the introduction of new tougher community consent processes still present challenges.

AR4 may also have an impact on the highly-competitive corporate PPA market, as solar and onshore providers may seek to benefit from the CfD subsidy newly available to them.

Aside from the reintroduction of PV and onshore wind, the allocation of a £200m budget for offshore wind demonstrates the strategic importance that the sector retains in the UK’s clean energy strategy, with this amount making up the majority of the overall budget for AR4. In the light of strike price competition resulting in effectively subsidy-free offshore wind (due to strike prices lower than the wholesale electricity prices assumed in AR3) after the previous allocation round, and September 2021 containing the first day of CfDs paying back to the LCCC since the start of the scheme, it will be interesting to see the extent to which this trend continues in AR4.

Furthermore, the ringfencing of floating offshore wind is a clear sign of BEIS’ support for this technology, and is reflective of the Government’s commitments under the Offshore Wind Sector Deal, under which it is committed to providing at least 30GW of offshore wind by 2030.