Contracts for Difference auctions to be held annually

The Department for Business, Energy and Industrial Strategy (BEIS) has announced that, starting in March 2023, Contracts for Difference auctions will be held on annual basis, rather than once every two years as has previously been the case.

The department said the annual auctions will include onshore wind and solar projects, which were excluded from the second and third allocation rounds but are participating in the fourth round that closed to applications on 14 January.

“We are hitting the accelerator on domestic electricity production to boost energy security, attract private investment and create jobs in our industrial heartlands,” said business and energy secretary Kwasi Kwarteng.

“The more clean, cheap and secure power we generate at home, the less exposed we will be to expensive gas prices set by international markets.”

BEIS said the Contracts for Difference (CfD) scheme has helped to bring down the costs of offshore generation by 65% since the first auctions were held in 2015 and enabled the UK to become one of the world’s largest generators of wind power.

It said the switch to annual auctions, which will take effect when the next allocation round opens in March 2023, will play an important role in unlocking £90 billion of private sector investment in low-carbon energy by 2030.

Energy minister Greg Hands added: “The UK is already leading the world in renewable energy and today’s announcement will take us even further. This will help provide cheaper energy to consumers, guaranteeing more of our energy is produced at home and reducing our dependence on fossil fuels.”

Commenting on the announcement, RenewableUK chief executive Dan McGrail, said: “Moving to annual CfD auctions is a major step forward which will significantly accelerate the speed of our nation’s transition to net zero. It’s good news for consumers too, as it means the UK will be reducing its vulnerability to volatile international gas prices and increasing the volumes of low cost renewable energy in our energy system.

He continued: “There’s a huge appetite among renewable energy developers to invest in building more projects, which will help to grow the UK supply chain at a faster rate. This will enable us to maximise the economic benefits which this sector offers to everyone, especially in parts of the country which urgently need levelling up.

“We need build up to 4GW of new offshore wind capacity every year to stay on track for net zero, which means quadrupling our current annual rate. Similar increases in onshore wind, solar and other clean power sources are vital too, as well as ramping up the roll-out of innovative technologies like floating wind, green hydrogen and marine power.”

BEIS said the CfD scheme has so far supported the deployment of around 16GW of low-carbon generation, including 13GW of offshore wind.

The fourth allocation round is offering up to £285 million of annual subsidies split across three pots: £10 million in the pot 1 auction for “more established” technologies such as onshore wind and solar; £75 million in the pot 2 auction for “less established” technologies such as floating and remote island wind; and £200 million in the new pot 3 dedicated to offshore wind.

Speaking to Utility Week in December, Aurora Energy Research associate Edward Pizzey said he expected the allocation round to deliver around 12GW of additional low-carbon generation: 5GW of onshore wind and solar – the maximum allowed under the cap for pot 1; 1GW of less-established technologies; and 6GW of offshore wind.

Further reaction

Emma Pinchbeck, chief executive, Energy UK

“We are delighted with the government’s decision to move to annual CfD auctions, which we have long advocated for as we transition to net zero. The CfD scheme has been critical to facilitating investment in renewable energy and annual CfD auctions will drive further investment, boost the UK’s supply chain as well as lower energy bills as we reduce our reliance on international gas prices.”

Danielle Lane, UK country manager at Vattenfall and co-chair of the Offshore Wind Industry Council

“Annual auctions are a welcome signal to renewable investors and developers that the government remains committed to rapidly increasing the UK’s offshore wind capacity, something which is urgently needed to help our energy security and to combat climate change. Unleashing renewables will be good for the UK economy, create jobs and is the long-term answer to the energy price crisis.

“The reassurance which developers have been given today could be further strengthened by reducing the level of upfront risk that investors have to take here compared with other countries. A single agency for offshore wind development to coordinate leasing, consents and vital issues such as grid connection and environmental protection – similar to the role the Oil and Gas Authority plays for that sector – could drastically reduce the time and complexity involved in developing offshore projects.”

Morag Watson, director of policy, Scottish Renewables

“By 2050 demand for electricity will have almost doubled, and the vast majority of that electricity must come from renewable sources if we are to meet net-zero.

“The Contracts for Difference mechanism plays a central role in facilitating that, and increasing the frequency of auctions is essential if we are to tackle climate change. Today’s announcement is therefore welcome, and we are pleased to see government responding to industry calls for this to happen.”

Antony Skinner, energy partner, Ashurst

“This is a very positive step for the renewables industry as it will give developers of new projects greater flexibility in relation to project timelines and will allow a potentially larger and more varied pipeline of projects to be developed.”

Nigel Pocklington, chief executive, Good Energy

“Right now, renewable generators in the CfD scheme are about the only thing mitigating the energy crisis in the UK, paying back to households when our reliance on gas is driving up bills.

“Annual auction rounds, which Good Energy has campaigned for for some time, will provide much needed investment in new renewable infrastructure projects, whilst also accelerating the transition to a zero-carbon electricity system.

“This move suggests the government recognises the need for urgent action to tackle the climate crisis, even if fringe elements of their party would prefer to keep extracting fossil fuels in the UK with no thought for the long-term consequences.

“We need to do everything possible to move to cleaner, greener energy and reduce the threat posed by volatile international gas prices.”

Simon Cran-McGreehin, head of analysis, Energy and Climate Intelligence Unit

“Whilst gas producers have been profiting from rocketing gas and power prices, renewables under the Contracts for Difference scheme have been paying back and cutting bills – to the tune of £35 a year from this April.

“Doubling down on investment in homegrown renewables will provide ongoing savings and cushion households from a future gas crisis. More frequent, annual auctions under the net zero target will provide a steady stream of opportunity to British renewables projects supporting jobs in levelling up areas.”

Frank Gordon, director of policy, Association for Renewable Energy and Clean Technology (REA)

“The REA welcomes the move to annual CfD auctions as confirmed by BEIS today. We and others have called for more frequent auctions for a number of years, most recently in response to the energy bills crisis. More power will be needed as sectors decarbonise, and moving to renewable, domestic energy supplies is ultimately the only way to prevent us being exposed to volatile international fossil fuel prices that drive bill increases, while enabling net zero.

“The fact that CfD projects have paid back several million pounds to the Treasury illustrates the cost effectiveness of new renewable power. We look forward to seeing more detail on the proposed timetable and budget for the auctions and would like to see a timetable of at least a rolling three-year dates, ideally out to 2030, to allow industry time to plan.

“The success of offshore wind needs to be replicated for other essential technologies, such as wave and tidal, geothermal, ACT and bioenergy, to ensure a balanced generation mix with benefits felt across the country.

“We now urge the government to move at pace to introduce effective flexibility markets, support for long term energy storage, decarbonise the heat sector and introduce new measures to allow householders to reduce their energy usage in the face of rising bills.”

Merlin Hyman, chief executive, Regen

“Today’s announcement that the UK government will hold annual CfD rounds is a welcome move towards building a resilient energy system powered by renewables and protecting consumers against rising bills.

“Regen recently wrote to Kwasi Kwarteng calling for more regular CfD auction rounds to provide a much clearer long-term strategy for renewable energy deployment. Annual CfDs will send a positive signal to investors, allow developers to build their project portfolios, utilities to invest in grid infrastructure and supply chain companies to build the jobs, skills and capabilities needed to efficiently deliver net zero.

“CfDs are also an excellent national hedge against rising power prices. The Low Carbon Contracts Company recently announced that in the last quarter of 2021 generators paid back over £133 million to the CfD scheme, helping to reduce levy costs for bill payers.

“Regen will now be pressing the government for more ambition on the amount of renewables awarded in each round to match the 70 GW of onshore wind and solar needed by 2035 if we are to keep on track for net zero, and to ensure CfDs work better for innovative technologies such as floating offshore wind.”

Steve Scrimshaw, vice president, Siemens Energy UK & Ireland

“We certainly welcome BEIS moving to holding CfD rounds annually. The CfD has been important to underpin the successful deployment of renewable energy across the UK whilst rapidly reducing costs, and an annual auction will play a key role in the UK achieving its aim of quadrupling the amount of offshore wind available over the next eight years.

“The move will also give wider offshore wind supply chain the assurance that the UK is a key market, and crucially, allow for greater innovations in floating offshore wind, taking advantage of deeper waters. However, while this is a positive step, it is important that the transmission system is able to cope with the higher volume of renewable generation and steps to achieve this should be taken immediately.”