Overhaul of CfD auctions tabled

The cheapest bids will no longer automatically win Contracts for Difference (CfDs), meaning potentially higher electricity bills for consumers, under government plans to reform its main renewable power support regime.

The proposal to introduce non-price factors into the process for awarding CfDs is outlined in a call for evidence paper published by the Department for Energy Security and Net Zero today (17 April).

Under the current CfD regime, the 15-year contracts are awarded to the lowest priced bidder via a process of competitive auctions, progressively reducing for UK consumers the cost of renewable electricity procured via the scheme over recent years.

However the recent worldwide surge in inflation has sparked concern that this reduction in renewable deployment costs must go into reverse in order to attract bidders for future auctions.

The DESNZ paper points to a swathe of challenges including renewable energy supply chains struggling to cope with upward pressure on costs; increased supply chain disruption; surging global demand for renewable energy and limited manufacturing capacity for key components.

“Low margins and a tough economic environment are making it more challenging for industry to support longer term investments,” it says, warning of a near term risk of “deployment challenges and bottlenecks arising from these global pressures”.

Under the government’s proposals, applicants for CfDs would have to balance costs with non-price factors, such as sustainability, addressing skills gaps and enabling system flexibility and operability. An example is that investment in infrastructure that builds up the industry’s wider capacity, such as ports and the grid, could be among the non-price factors rewarded.

However introducing these additional factors into the CfD process could increase deployment costs with knock-on consequences for consumers bills, while adding to the complexity of auctions, the paper acknowledges.

The paper outlines three options for introducing non-price factors.

They include a “top-up” to the CfD strike price, based on non-price factors, which would be added over the contract’s initial years once the auctions have been run.

This model is the least complex of the options to implement and would involve the fewest changes to the CfD process but would reduce the government’s ability to control the impact on electricity bills.

Under another model, which is similar to that used by many countries in the EU, non-price factors could influence how CfD bids are ranked.

The government is also exploring whether to scrap the existing rule exempting sub-300MW projects from supply chain requirements.

The introduction of non-price factors is in line with recommendations in a report, published on 5 April, by the government’s offshore wind champion Tim Pick. It also reflects concerns expressed in ex-energy minister Chris Skidmore’s net zero review.

The government’s paper has been welcomed by renewables developers.

Ana Musat, executive director of policy at RenewableUK, said: “Going forward, it’s clear that awarding CfDs shouldn’t just be based on a race to the bottom on prices, but it should also take account of the wider economic and environmental benefits which this industry can deliver.

“So we’re advocating a sustainable approach on prices to support long-term industrial growth, innovation and supply chain development.

“This would enable us to maximise the economic benefits which this industry has to offer, including creating tens of thousands of high-quality jobs over the course of this decade”.

Chris Hewett, chief executive of Solar Energy UK, said: “The reforms outlined today appear to be broadly aligned with our own objectives.”

Under the CfD process, 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 translate to lower bills for consumers.