Budget boost unlikely to shift prospects for next CfD round

The government’s eleventh hour £20 million budget boost for next month’s Contracts for Difference (CfD) auction will not significantly increase the chances of a successful exercise, says a new report that outlines how overhauling the renewables subsidy scheme’s rules could cut customers’ bills.

Ministers increased the size of the budget allocated for Allocation Round 5 (AR5) of the CfD from £170 million to £190 million as part of its wider set of energy week announcements earlier this month. The results of the allocation round are due to be unveiled in early September.

The move to relax the AR5 budget followed renewable giant Vattenfall’s announcement last month that it is halting work on its Boreas offshore wind farm because inflation means that the CfD strike price of £37.50/MWh (2012 prices) awarded for the project last year is no longer economic.

However, an analysis published by the Energy and Climate Intelligence Unit, describes the £20 million boost for AR5 as an “eleventh hour move [that is] not expected to make a significant difference to the amount of offshore wind that may be secured and is still £10 million less than the budget pot for AR4 despite noticeable and global increases in the inflation and the cost of most materials”.

Instead the analysis outlines proposals for an update of the rules governing the Levy Control Framework, which caps the capacity of power generation that can be secured at CfD auctions and was drawn up during David Cameron’s government when renewable electricity was more expensive than fossil fuel generation.

It says that both the pot size of the auction budgets and the reference price, which is the benchmark for CfDs set by the wholesale electricity market, are too low.

Under the CfD scheme’s rules, renewable generators receive top up payments when wholesale electricity prices are lower than the guaranteed strike prices agreed in their contracts. However when the opposite is the case, as has been typical since the onset of the gas crisis two years ago, renewables generators pay back the difference to suppliers.

The analysis says that an increase in strike prices for CfDs in AR5 by 20% to around £60/MWh (2023 prices) would still mean renewable power purchased through the auction will be one third cheaper than the level commentators reckon wholesale prices will be for the remainder of this decade.

If the pot 1 budget for established technologies was set at £400 million per year and the reference price was raised by just 5%, the report says that even with a 20% increase in strike prices when compared to AR4, the AR5 auction could secure 7GW of offshore wind, saving consumers £1.6 billion per year.

The analysis adds: “Updating the old rules would enable the government to secure as much capacity as possible, bringing down bills, creating job opportunities, particularly for staff leaving the declining oil and gas industry.

“The concept of the reference prices and budget pot size could be less relevant. In principle, the auctions could secure larger capacities, with the only legitimate limiting factors being the speed at which projects can move through the supply chain and the need to retain an incentive to submit the best bids.”

While the chances of a successful auction next month are uncertain, the report says there is opportunity to get the CfD back on track quickly in next year’s AR6.