Government allocates £60m to next CfD auction

The government has provisionally allocated £60 million of annual subsidies to the third Contracts for Difference (CfD) auction due to take place in May 2019.

Speaking in the House of Commons, energy and clean growth minister Claire Perry said the funding would form part of a new sector deal for offshore wind that the government is “in the final stages of concluding”.

She said it would also include “a series of substantial commitments” from companies in the sector to increase the amount of money they spend in the UK.

According to the draft budget notice for the auction, the administrative strike prices for offshore wind – the maximum at which developers can secure a contract – have been set at £56/MWh and £53/MWh respectively for projects commissioning in 2023/24 and 2024/25.

For comparison, the Hinkley Point C nuclear power station currently under construction in Somerset was allocated a strike price of £92.50/MWh, falling to £89.50 MWh if EDF Energy proceeds with a sister project at the Sizewell C nuclear site in Suffolk.

In the most recent auction in September 2017, two offshore wind projects – Moray East and Hornsea Project Two – won contracts at just £57.50/MWh.

The document states there will be no maxima or minima for particular technologies, although the overall capacity procured will be capped at 6GW.

Administrative Strike Prices

Source: The Department for Business, Energy and Industrial Strategy (BEIS).

The £60 million of annual subsidies on offer is little more than one fifth of the £290 million made available in last year’s auction and one tenth of the £557 million the government has committed to future auctions for less established technologies.

Kate Blagojevic, head of energy at Greenpeace UK said: “This is a genuinely bewildering move by the government that misses the opportunity to drive down offshore wind costs as fast as possible.

“They promised over half a billion pounds in investment, that was widely expected to be divvied up and made available in sizeable chunks over the next few years. But this first chunk is a pitiful sum that could end up limiting UK export potential and jeopardising our climate goals.”

However, Jonathan Marshall, head of analysis at the Energy and Climate Intelligence Unit, said the smaller budget may merely reflect the rapidly falling costs of offshore wind: “While slashing the size of the pot available for new renewable capacity may cause concern at first glance, what it really shows is the extent to which the cost of offshore wind has plummeted.”

Hugo Batten, head of GB renewables at Aurora Energy Research, told Utility Week the government may be “backloading” spending so it can buy more offshore wind when costs come down in the future, whilst challenging the industry to beat the low prices seen last year’s auction.

However, he also argued the budget may be less constricting than it initially appears.

The value of a contract is calculated based on the difference between the strike price and the reference price – a measure of the average wholesale price for electricity.

In an accompanying document to the draft budget notice, the government gave its preliminary forecast for reference prices between 2023 and 2027, which for intermittent technologies range from around £48.60/MWh to £52/MWh, depending on the year.

Reference Prices

Source: BEIS

Batten said the forecast indicates the contracts will be worth relatively little on a per megawatt hour basis, allowing the auction to procure multiple gigawatts of installations, despite the low budget. He said the auction is also likely to be highly volatile, as small differences in strike prices will translate into big swings in capacity.

For example, if you assumed a reference price of £50/MWh and a strike price of £56/MWh, the £60 million budget could secure up to 2.3GW of new offshore wind capacity. With a strike price of £53/MWh, this figure would double to 4.6GW.

He said Aurora’s modelling suggests the government has underestimated the impact of price cannibalisation by existing renewables, creating a risk of overspending in the auction.

Note: All figures quoted in 2012 prices.