UK Government consults on the future of the CfD scheme

United KingdomScotland

On 14 December 2022, the Department for Business, Energy and Industrial Strategy (“BEIS”) published a consultation on the future of the CfD scheme (the “Consultation”) in respect of Allocation Round (“AR”) 6. This is a separate consultation to the BEIS consultation on changes to the AR5 CfD contract, which we have reported on here as well as reporting on the recently published documents relating to proposed updates to the AR5 Core Parameters and Administrative Strike Price methodology, which can be found here.

Key points under consideration by BEIS in the Consultation are as follows:

  • whether to make electricity supplied to offshore oil and gas facilities ineligible for CfD payments to ensure such arrangements do not raise costs for consumers;
  • whether the definition of Floating Offshore Wind should be altered in light of emerging technological developments;
  • whether offshore wind farms connecting to a ‘hybrid’ or ‘multi-purpose’ interconnector should be eligible to apply for a CfD (in AR7 and beyond) and how this could be enabled;
  • whether offshore wind phasing policy is still required or whether it should be removed to prevent projects generating on a merchant basis before triggering the CfD start date, in order to take advantage of higher wholesale market prices in the short term;
  • whether the current CfD appeals process remains appropriate; and
  • whether the CfD appropriately supports repowered assets.

Consultation on the future of the CfD Scheme

BEIS is consulting on a number of proposals/amendments to be implemented in future CfD Allocation Rounds. The consultation focuses, in the most part, on offshore wind.

With respect to AR6, BEIS expects Private Network CfD Agreements to become more popular to support the electrification of offshore oil and gas facilities as the oil and gas industry commits to emissions reductions. BEIS is concerned that the proliferation of such arrangements, which are supported by floating offshore wind projects, could place an increased burden on household energy prices as a result of the comparatively high costs of floating offshore wind as a technology. BEIS is therefore considering whether to make electricity supplied via private wire to offshore oil and gas facilities ineligible for CfD payments and seeks views on such proposal.

BEIS is also consulting on future CfD allocation rounds more broadly, including:

  • Whether the definition of Floating Offshore Wind should be altered (for AR7 and beyond) to ensure that emerging technological developments are not precluded from the CfD;
  • As part of the OTNR, Government is considering ‘hybrid’ or ‘multi-purpose’ interconnectors, whereby an offshore windfarm would connect directly to an interconnector, instead of using separate radial connections to GB’s onshore electricity network. However, under the existing legislation and contract framework, there is no provision for a renewable generation asset that is connected to an interconnector to be eligible to apply for a CfD. The consultation is therefore seeking views on whether offshore wind farms connecting to a ‘hybrid’ or ‘multi-purpose’ interconnector should be eligible to apply for a CfD (in AR7 and beyond) and how this could be enabled;
  • Whether offshore wind phasing policy is still required given the significant developments seen in the offshore wind sector and the impact such removal could have on offshore wind projects. In particular, BEIS seems keen to close a perceived loophole which enabled projects to generate on a merchant basis before triggering the CfD start date, in order to take advantage of higher wholesale market prices in the short term;
  • Whether the current CfD appeals process remains appropriate given the shift to annual auctions (again, any changes would only apply from AR7 or beyond); and

Whether the CfD appropriately supports repowered assets, what are the main barriers of entry to the CfD for repowering projects and how repowered projects should be defined.

Commentary

The Consultation reflects BEIS’s ongoing goal that the CfD regime continues to deliver value to consumers. To that end, both the proposed exclusion of electricity supplied by private wire to offshore oil and gas facilities from the CfD regime and the proposed changes to phasing of offshore wind projects demonstrate a more robust and less flexible Government policy. That said, the Consultation also recognises that novel technologies are developing. The proposed amendments to the definition of Floating Offshore Wind seek to remove uncertainty which has been stymieing commercial opportunities. Yet the loss of ability to phase large offshore wind projects would make a significant change to the existing risk allocation and would need further consideration.

What’s next?

The closing date for responding to the Consultation is 7 February 2023. Responses can be submitted here.