Risk renewables developers may shun CfD auction

Increasing capital costs associated with renewable energy projects risks making some schemes financially unviable.

The warning comes following yesterday’s [16 March] announcement that the government has set a budget of £205 million for the first annual Contracts for Difference (CfD) allocation round.

According to Cornwall Insight’s report into capital costs and their impacts on the government’s fifth CfD allocation round, the weighted average cost of capital (WACC) for renewable projects has increased by about 4% since early 2021.

The report adds that rising inflation, increasing material costs and labour shortages have all attributed to the WACC increase.

It adds that rising costs are making developers increasingly concerned about bidding in the next CfD allocation round.

The report adds: “Although CfD strike prices have typically fallen, a rising WACC and the subsequent increase in the levelised cost of energy (LCOE) may lead to higher strike prices in the upcoming fifth allocation round (AR5).

“If the strike prices generators assess as realistic were granted during AR5, it would likely enable them to offset the escalating capital costs. However, the government sets a limit, known as the administrative strike price (ASP), on how high the strike prices can go, and despite the rising costs, the ASPs have decreased significantly since the start of the subsidy scheme, with many in the industry highlighting that these are now set too low to allow projects to succeed.

“Alongside the concerns for AR5, rising capital costs may also impact the success of projects from previous CfD allocation rounds, which bid in at prices that may no longer be economically viable.”

Energy UK deputy director Adam Berman said that the CfD budget will do little to ease the nerves of developers to invest in renewable energy projects.

He added: “The auction parameters do not appear to reflect a much-changed picture for developers since the last auction.

“This brings the risk that it will not deliver the amount of projects and capacity that we urgently need to ensure our energy security, cut bills, and reduce emissions.

“We will continue to work with the Department for Energy Security and Net Zero on the details of the scheme, but the government risks putting its own targets in jeopardy if it doesn’t adapt the scheme to recognise the realities of building new renewables projects amidst rising costs and increased international competition”.

Following the latest CfD budget announcement, RenewableUK economics and markets manager Michael Chesser also warned that this year’s allocation may be too low and called on the government to revise it.

“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,” Chesser said.

“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”.