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The Department for Business, Energy and Industrial Strategy (BEIS) has published its final budget notice for upcoming fourth Contracts for Difference allocation round, which will award up to £285 million annual subsidies to low-carbon generators.
The figure has increased by £20 million from its draft budget notice in September after the department announced additional ring-fenced funding for tidal stream projects earlier this week.
The funding will be divided between three technology pots.
The first pot for more established technologies – onshore wind, solar, energy-from-waste with combined heat and power (CHP), hydro and landfill and sewage gas – will offer annual subsidies of up to £10 million for delivery starting in 2023/24 and 2024/25.
The government has not held a pot 1 auction since the first competitive allocation round in 2015, leaving onshore wind and solar without access to the support mechanism for more than half a decade.
Onshore wind and solar are expected to dominate the auction, bidding at strike prices at or below their reference prices – estimates of the average prices they could expect to receive on the wholesale electricity market.
As generators receive or make top-up payments based on the difference between their strike price and their reference price, these contracts would be subsidy-free and would not be limited by the £10 million budget.
BEIS has therefore applied an overall capacity cap for the auction of 5GW and individual caps of 3.5GW each for onshore wind and solar to ensure competition for contracts.
The second pot for less established technologies – floating offshore wind, remote islands wind, tidal stream, wave, advanced conversion technologies (biomass), dedicated biomass with CHP and anaerobic digestion – will allocate up to £75 million of annual subsidies for delivery starting in 2025/26 and 2026/27.
The pot 2 auction will include minima of £24 million and £20 million for floating offshore wind and tidal stream projects – ring-fenced subsidies to which they will have first access. The sub-auction for tidal stream will be held first, followed by the sub-auction for floating offshore wind. A capacity cap will not apply to this pot.
For the first time, there will also be a third pot dedicated solely to fixed-bottom offshore wind. The government created the pot after concluding that the technology is not yet cost-competitive with onshore wind and solar but would swallow up most of the funding for less established technologies if it remained in pot 2.
The auction for delivery starting in 2025/26 and 2026/27 will allocate annual subsidies of up to £200 million but will not be subject to a capacity cap.
BEIS also confirmed the administrative strike prices for each technology – the maximum they can receive – and the reference prices, which have increased in number from two to five, with a baseload reference price and then individual prices for offshore wind, onshore wind, solar and hydro.
The department noted that the auction parameters, including budgets and administrative strike prices, are based on the assumption of relevant generators paying Balancing Services Use of System charges. It said Ofgem is considering removing these charges from generators and that the strike prices of successful projects would need to be adjusted downwards by £4.29/MWh if this happened.
The fourth Contracts for Difference allocation round is due to open on 13 December and the closing date for applications is 14 January 2022. BEIS expects the auctions to allocate contracts for up to 12GW of low-carbon generation – more than the first three allocations rounds combined.
Note: All figures quoted are in 2012 prices
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