UK Government consults on AR7 and future CfD Allocation Rounds

1. Introduction

On 11 January 2024, the Department for Energy, Security and Net Zero (“DESNZ”) published a consultation seeking views and supporting evidence on the proposed changes to the seventh Allocation Round (“AR7”) of the Contracts for Difference (“CfD”) scheme and long-term policy considerations concerning future CfD rounds (the “Consultation”). Our commentary on the previous CfD AR6 consultation and the government response to this can be found here.

2. Consultation on the Future of the CfD Scheme

In light of recent challenges faced by the industry, such as supply chain constraints and high inflation, DESNZ is seeking to adapt the CfD scheme (via the changes discussed in the Consultation) in the hope that this will help it to promote further generation of renewable electricity quickly and sustainably, while considering the potential cost of supporting such projects for electricity consumers.

The Consultation covers the following topics:

Repowering: many renewable assets may reach the end of their operational life in the late 2020s and throughout the 2030s. DESNZ proposes allowing repowering projects (onshore wind only) to apply for the CfD scheme under certain conditions. The Consultation states that onshore wind is the only technology that meets all the criteria proposed for full repowering, and each project must also:

• have reached the end of its operating by AR7 delivery years: DESNZ estimates in the Consultation that there is a potential pipeline of approximately 1.3 GW of onshore wind reaching end of operating life that will require consideration in time for AR7 delivery years;
• have high upfront capital costs similar to a new build and be unable to recoup O&M costs: full repowering of an onshore wind site may be similar in cost to that of commissioning a new build. While some costs will be avoided, such as those incurred in securing land rights, the costs of turbine supply and construction will equal or be greater than that of a new site given the need to remove and dispose of existing infrastructure as well as purchase and install new infrastructure; and
• be able to at least retain its current capacity over the term of the contract: previously repowered onshore wind projects have proven that technological developments, such as an increased power rating of turbines, can increase the capacity of the original projects (assuming the necessary approvals have been obtained, such as planning consents, Environmental Impact Assessments and grid connections). The Consultation states that, while the ability to fully repower each onshore wind project may vary on a case-by-case basis, there is enough evidence to show that increased capacity is possible via full repowering.

The Consultation also proposes amending the CfD Regulations to allow forward bidding, which would enable a generator to apply for a CfD for the purposes of repowering while the original project is still operating. Under the current framework, generators cannot make a CfD application for a project which is already commissioned, meaning that the generator would need to decommission that project before applying for a CfD. The Consultation highlights how this restriction could disadvantage repowering projects relative to new builds, cause delays, and increase periods of non-generation.

Appeals: DESNZ is considering streamlining the appeals process for the annual Allocation Rounds to streamline the appeals process, reduce delays, and increase certainty for developers and consumers. The Consultation proposes three options to achieve this:

1. keep the current two-tiered appeal process but publish a fixed timetable for the maximum timeline for such process, regardless of whether any appeals are made;
2. introduce regulations to rule out certain grounds for appeal, such as clerical errors or lack of documentation. As there are currently no such regulations, the Consultation suggests that a more robust stance on such issues could help to reduce the number of appeals and, as a result, reduce delays; or
3. introduce a pre-qualification process and move the qualification checks and appeals process before the Allocation Round opens to applications, similar to the Capacity Market model (this is highlighted as the preferred option of the three).

Phased CfDs for floating offshore wind: the Government aims to deliver up to 5 GW of floating offshore wind by 2030 and expects further sector expansion in the 2030s. DESNZ proposes extending the phased CfD policy to floating offshore wind projects in the same way as it applies to fixed-bottom offshore wind projects. Under a phased approach, a project can be constructed in up to three phases. At least 25% of the total project capacity must be constructed and commissioned in the first phase, and the target commissioning date (“TCD”) of the final phase must be no later than two years after the TCD of the first phase.

Co-location generation and hybrid metering: the Consultation proposes to introduce a hybrid metering approach, which would make it easier for CfD generators to co-locate with other assets while maintaining the integrity of the CfD scheme. Current guidance on CfD co-located generation is limited in scope and requires all assets to be metered at the Balancing Mechanism Unit (“BMU”) level. The Consultation suggests that this could cause several challenges, such as complex requirements to separate CfD and merchant generation at BMU level. The Consultation indicates that hybrid metering would allow CfD generators to measure their output at a sub-BMU level co-located with other assets.

In respect of long-term considerations for all future CfD rounds, DESNZ is seeking views on the following proposals:

Offshore transmission infrastructure: improved coordination is needed as more offshore wind infrastructure is built to minimise the number of individual new connections and disruption to communities and the environment. This includes the use of offshore hybrid assets (namely multi-purpose interconnectors (“MPIs”)) and/or bootstrap infrastructure. The Consultation asks stakeholders for their views on the use of MPIs and/or bootstraps as well as evidence on the additional costs and benefits to consumers of an offshore wind-MPI arrangement. In an attempt to determine how offshore wind generators ought to be compensated through the use of such transmission infrastructure, the Consultation cites the responses to an Ofgem-DESNZ consultation on market arrangements for MPIs, whereby a “Flexible CfD” framework appears to be the most promising option. Under this framework, the consumer pays the top up from either the GB or foreign market reference price. The Consultation requests that stakeholders provide any other options that could better address the issues outlined above.

Innovation in floating offshore wind foundation technology: the Consultation seeks stakeholder views on defining floating offshore wind under the CfD scheme in a way that does not hinder new or innovative offshore wind foundation technologies (after a lack of consensus on this proposal in the previous AR6 consultation). The Floating Offshore Wind Taskforce (the “FOWT”) has been considering the definition of floating offshore wind and concluded that it is not feasible to create a catch-all definition, due to the variety of designs and uncertainty about which deep water technologies will be the most commercially viable. FOWT considered explicitly defining established offshore wind foundation technologies and making them ineligible to compete with emerging technologies for higher administrative strike prices. Technologies that do not fit such established definitions would be considered as emerging. FOWT was also not in favour of a definition based on water depth, as this factor alone does not necessarily determine the need for novel solutions, nor does it necessarily result in increased costs. However, the Government still considers a minimum water depth requirement necessary for emerging foundation technologies. The Consultation is seeking views on the workability of this approach.

CfD indexation and inflation risks: although CfDs already incorporate indexation (via the Consumer Prices Index (CPI) indexation of strike prices), DESNZ is considering whether to update the CfD indexation methodology to provide greater inflation protection during project construction periods.

DESNZ states that the changes proposed in the Consultation would (if implemented) build on the plans of the proposed CfD Sustainable Industry Reward (which was recently consulted on – a consultation which closed on 11 January 2024) to accelerate the deployment of low carbon generation, specifically offshore and floating offshore wind.

3. Commentary

The Consultation reflects the Government’s continued commitment on using the CfD scheme to achieve its decarbonisation targets for electricity. This Consultation also reflects the need to amend the CfD scheme to support innovation and maintain investor confidence to avoid a similar repeat of the AR5 auction, in which low strike prices (notwithstanding high inflation and supply chain issues) resulted in no offshore wind project bids.

Since many onshore wind projects in the UK were installed in the late 1990s and early 2000s, the volume of onshore wind projects reaching the end of their operational life towards the end of the 2020s is far greater than that of offshore wind and solar. Extending CfD support to repowered projects may prove a significant incentive for re-using some of the existing assets and infrastructure, thereby encourage a more efficient use of existing resources. Further, repowering existing sites which have adapted to existing infrastructure and may already benefit from community support and acceptance could further help with efficiency as well as mitigate planning and other project risks.

The hybrid metering proposal for co-located generation could be a promising way of enhancing system flexibility and encouraging the deployment of low carbon hydrogen and other emerging technologies. However, potential risks in respect of gaming or overcompensation, metering accuracy and system balancing ought to be properly addressed.

The Consultation recognises the paramount importance of the development of floating offshore wind technology, which remains yet to be industrialised at scale in the UK and beyond, with only around 200 MW of capacity currently deployed worldwide. The Consultation’s proposal to extend the phased CfD policy to floating offshore wind aims to provide greater certainty to developers and investors by mitigating the effects of construction risk and improving the commercial viability of such projects. Such support via the CfD scheme could potentially lead to a greater deployment of wind generation in deeper waters, where wind speeds are typically higher and more consistent.

4. Next Steps 

AR7 is expected to open in March 2025. DESNZ will hold a webinar on both 5 February and 8 February 2024 to discuss the Consultation proposals and answer any stakeholder questions. Registration details for the AR7 webinar can be found here.

The Consultation closes on 7 March 2024. Responses can be submitted here.