Contracts for Difference AR4 – Key trends looking towards AR5

Overview

On 14th October 2022 the UK Government released the draft timeline for AR5. The timeline proposes that the draft Allocation Framework outlining the core auction parameters including the pot structure, delivery years and Administrative Strike prices will be published in December 2022 and the AR5 application window will run from March to April 2023 with award notifications from July to September 2023. In light of this and the announcement in February 2022 that CfD allocations will be awarded annually, we set out here the key trends from the last allocation round and consideration of what this signals for the upcoming AR5.

AR4 represented the biggest CfD round to date with 93 projects (almost 11GW) awarded, almost double the capacity achieved in the previous round. The full results are available here. AR4 secured capacity from a range of clean technologies including, offshore wind, onshore wind, and solar. Floating offshore wind and tidal stream also featured for the first time with tidal stream securing 41MW and floating offshore wind securing 32 MW.

Solar

Solar PV projects were awarded contracted supply for 2.2GW of new capacity, which is relatively modest given the number of solar developments coming on line. The strike price for solar projects was £45.99/MWh with over 65 individual projects selected, the largest project being the 112MW Cleve Hill Solar Project in Kent. A majority of the projects are located in England and despite the continued support through the CfD scheme as the industry continues to develop, many projects are going ahead on a merchant basis. While no formal measures have been announced, some Government ministers have expressed a desire to change planning laws to limit Solar developments. This, with the low price achieved in AR4 and opportunities to sell directly to the market may continue to influence how many more projects will apply in AR5.

Onshore

Onshore wind also made a return in AR4 for the first time since 2015 with a strike price of £42.47/MWh. Development in onshore wind had somewhat stalled after the government excluded it from CfD auctions. All of the successful onshore wind projects awarded contracts are located in Scotland. The strike price awarded highlights the cost efficiency onshore wind offers and it is anticipated that their participation will continue in AR5.

Fixed Offshore Wind

Offshore wind provided a majority of the capacity awarded in AR4 at the lowest price of £37.35/MWh This continues the trend from AR3 where 5.5GW capacity was awarded. Innovation in technology, increased scale of projects and competitive pressured of the CfD scheme have contributed to the in the price secured being almost 70% lower than the price secured in the first round in 2015 and 6% lower than the previous round. This figure is higher than projections in part due to capital cost increases across the supply chain in the past year. Despite supply chain pressures offshore wind is expected to continue to win a majority of contracts in AR5 with many more projects in development following the ScotWind leasing round and to support progress towards the Government’s ambitious 2030 target.

Floating Offshore Wind

Floating wind was distinguished from fixed bottom offshore wind in a separate category (pot) in AR4. The definition of floating wind projects was amended so that projects should be location in waters with depths of 45 meters rather than the originally planned 60 meters.

The TwinHub Floating Offshore Wind Project was the only winning project awarded a CfD at a price of £87.30/MWh. The demonstrator project which will be trialled in the Celtic Sea off the coast of Cornwall may also be seen as a test case in the CfD process for future floating offshore bids. Given that 11 projects were included in the first ScotWind leasing round and many of these were floating, further projects will likely feature in AR5. The government has set a goal of having 24 GW of floating wind energy in the Celtic Sea alone by 2045. As the technology becomes more developed the price will likely fall in line with the development curves already witnessed with more developed technologies. However, with supply chain and inflationary pressures this may not be realised in AR5 and floating wind may be awarded at substantially higher prices to fixed offshore.

Tidal Stream

The inclusion of tidal power in AR4 was viewed as a positive step for the industry which is still at an early stage in its development, having achieved a strike price of £178.54/MWh.

Remote Island Wind

Remote Island Wind won a majority of the Pot 2 allocation in AR4 clearing at £46.39/MWh with 600MW capacity over 6 projects. The largest project awarded was Stornoway Wind Farm on the Isle of Lewis with 200MW capacity, this award will likely prove to be a boost to the region and the SSEN Western Isles Interconnector. The interconnector is in the early stages of development and would run for 81km between Stornoway on the Isle of Lewis to Dundonnell on the mainland with a projected completion date of 2027. Sitting in a separate category within Pot 2 has allowed these projects to progress against other Pot 2 participants - an approach that is likely to continue in AR5 and beyond.

Looking ahead

In August 2022 the Government announced key changes to the process for AR5 when it published the Supply Chain Plan and questionnaire, available here, for the next round. The changes announced are mostly procedural in nature. Floating Offshore Wind projects smaller than 300MW will be included in the Supply Chain Plan (SCP) process. Further the SCP pass mark will be raised from 50% to 60%, excluding Floating Offshore Wind projects smaller than 300MW for whom the pass mark will remain at 50%. Further, applicants for projects with capacity of 300MW or more, and all Floating Offshore Wind projects, will be required to provide National Grid ESO with a statement by the Secretary of State for BEIS approving the supply chain plan in respect of the project. In order to participate in AR5 applicants will have to comply with these new requirements and submit plans within the Supply Chain Application Window which is outlined to run from 5th – 12th December 2022 in the draft timeline.

This article was co-authored by Euan Rose, trainee solicitor at CMS.