CfD budget ‘sends the wrong investment signals’

The government has set a budget of £205 million for the first annual Contracts for Difference (CfD) allocation round.

Of the £205 million annual subsidies earmarked for CfDs in Allocation Round (AR) 5 of the government’s flagship renewable energy support scheme, £170 million will go to Pot 1 for established technologies, which for the first time includes offshore wind and remote island wind.

The remaining £35 million will be allocated to Pot 2, which covers emerging technologies such as geothermal and floating offshore wind. This smaller pot includes a £10 million ring-fenced budget for tidal power.

The latest allocation compares to £270 million earmarked in AR4, which covered two years, and delivered 10.8GW of renewable energy.

The government moved to annual auctions for CfDs in order to step up the pace of renewable energy deployment.

Results of the AR5 auction are expected in the late summer or early autumn of this year. However RenewableUK has warned that this year’s allocation, which is taking place against backdrop of surging supply chain inflation, may be too low.

The renewables umbrella body’s economics and markets manager Michael Chesser said: “Unfortunately, in the light of global inflationary pressures, the budget and parameters set for this year’s CfD auction are currently too low and too tight to unlock all the potential investment in wind, solar and tidal stream projects which the industry could deliver.

“Concerns about energy bills and energy security are at a record high, so the UK should be trying to maximise investment in low-cost clean energy, to provide relief for billpayers who’ve been hit hard by massive spikes in global gas prices over the past year.

“At a time when the US and EU are bending over backwards to offer incentives for renewable energy developers to come to them to build new projects, the UK is sending the wrong investment signals. As a result, we risk losing vital opportunities to scale up our supply chains around the UK, denying communities the industrial-scale benefits which our sector offers. We’re also jeopardising our global lead in cutting-edge clean energy technologies like floating wind and tidal stream.

“We’re calling for the government to revise the CfD budget so that we can stay on track to deliver on our renewable energy targets, as well as creating tens of thousands of high-quality green tech jobs and attracting billions in private investment in the years ahead”.

The Marine Energy Council (MEC) also criticised the government’s proposal to cut the sums ringfenced for tidal power, which was £20 million in AR4, to £10 million.

Sue Barr, chair of the MEC, said: “The industry shares the government’s desire for TSE (tidal stream) to take the same cost reduction journey as wind and solar. This will be achieved through deployment, which requires consistency from the policy environment.

“I hope the government reviews today’s decision, retains the £20 million ringfence as set in AR4, and works with industry to ensure the UK’s project pipeline is supported. This is necessary to realise the UK’s tidal stream potential and to unlock investment in coastal communities and beyond.”

AR5 is scheduled to open to applications on 30 March. After the closing date, National Grid ESO will assess and value all qualifying applications and notify the energy secretary of state, who may then consider whether to increase the budget for the allocation round.

Under the CfD mechanism, operators of projects are guaranteed a minimum strike price per MW hour agreed in the auction process. If the wholesale price of electricity is higher than this level, generators pay back the difference, which will then be passed on to energy suppliers and in turn is expected to translate into lower bills for consumers.