BEIS proposes new pot structure for CfD auctions

Onshore wind and solar projects will be allowed to bid for Contracts for Difference (CfDs) for the first time in many years after the government confirmed plans to hold an auction for more established pot 1 technologies in 2021.

This is in addition to the pot 2 auction for less established technologies that was already expected next year as part of the fourth competitive allocation round.

In a consultation published this afternoon (2 March), the Department for Business, Energy and Industrial Strategy (BEIS) proposed a series of other changes to the scheme, including the creation of a separate pot for offshore wind.

The document welcomed the emergence of subsidy-free onshore wind and solar projects due to falling costs – noting that a number have already deployed or are planning to deploy on a merchant basis – but said there is a risk these technologies will not proliferate at a sufficient rate without price support.

“We expect that some of these technologies have the lowest costs and would be able to secure CfDs at strike prices below the average expected wholesale price for electricity, and so over the course of a contract may pay back as much, or more, than they receive in CfD top-up payments,” it explained.

“Therefore, running an allocation round in 2021 which includes established technologies will help deliver a diverse generation mix at low cost, as well as give a clearer signal of the costs of these technologies, several years on from the previous auction.”

Despite also seeing large cost reductions in recent years, with a number of projects securing contracts at prices of around £40/MWh (2012 prices) in the third allocation round in 2019, BEIS decided against moving offshore wind to pot 1 or holding technology neutral auctions.

It worried that this would allow the lowest cost technologies to dominate the auctions, halting the success of technologies which are currently more expensive but will eventually become cheaper with further deployment.

However, the consultation likewise raised concerns that offshore wind could do the same within pot 2, and therefore proposed to create a third pot specifically for offshore wind.

It acknowledged the risk that this would reduce competition but said it would allow the auction parameters to be more closely tailored to the technologies in each pot.

The government is also considering introducing floating wind as a separate technology class within pot 2. Although its prior commitment to deliver to deliver 30GW of offshore wind by 2030 – since raised to 40GW in the Conservative election manifesto – could theoretically be delivered entirely with fixed foundation turbines, BEIS said this may not work out in practice and floating turbines will likely be needed anyway to meet the UK’s long-term emissions targets.

Carving out a separate space for floating wind, which would be outbid if forced to compete against other offshore wind, would allow costs to be brought down over the next decade before the technology is rolled out at a larger scale during the 2030s.

BEIS has additionally proposed to:

• Prevent generators from collecting top-up payments during periods of negative pricing
• Extend the delivery years for the CfD scheme until 31 March 2030
• Exclude new coal-to-biomass conversions from future auctions
• Strengthen the delivery incentives
• Review the supply chain policy to ensure its supports the local economy
• Update the community benefits guidance for onshore wind to ensure commitments are honoured for the full life of a project and create opportunities for local communities to invest
• Address barriers to the co-location of storage with CfD projects
• Link the decommissioning regime for renewables into the CfD scheme
• Make a series of technical changes, including amending the formula for calculating the budgetary impact of contracts and introducing flexibility over the application of budgets and capacity caps
• Maintain the existing cap on phased offshore wind projects at 1.5GW

The deadline for responses is 22 May.