Trade bodies urge CfD reform to end ‘race to the bottom’

Three trade bodies have called on the government to make urgent reforms to the annual Contracts for Difference (CfD) auctions, warning the current scheme is eroding industry’s capacity to invest in critical infrastructure.

RenewableUK, Energy UK and Scottish Renewables raised concerns about what they describe as “the race to the bottom on strike prices” which is “at odds with the reality of project costs and investment needs”.

In an open letter to energy security secretary Grant Shapps, the three organisations call for a broader approach in defining how best value is delivered from Allocation Round 5 (AR5) onwards for both industry and consumer.

They further warned: “The current emphasis on securing renewable capacity at the lowest possible strike price – minimising expenditure rather than maximising benefit – risks creating a less attractive investment environment in the UK.

“The race to the bottom on strike prices incentivised by the current auction process is at odds with the reality of project costs and investment needs, jeopardising deployment targets.

“This is especially relevant for supply chain companies that have been recording losses as the continuous squeeze on strike prices has been passed on to them. CfD strike prices are no longer cost reflective and, consequently, the industry’s capacity to invest in critical infrastructure and domestic supply chain is being eroded.”

The three trade associations point to the financial incentives being offered in the US and the EU, as well as supportive regulations, to renewables developers and supply chain companies. As a result, they say, the UK cannot guarantee its position as a world leader in clean energy.

As such the letter presents several recommendations to lower energy bills by maximising private investment in renewable technologies, while also ensuring the growth of industrial supply chains throughout the UK.

It calls for the government to reassess and uplift the budget for AR5 to allow more projects that are eligible, to bid. As an example of why this needs to be done, it points to the fact that the budget for fixed-foundation offshore wind alone would need to be at least two and a half times higher than its current level to maximise the capacity which could now be secured in this year’s auction.

It further suggests that this type of offshore wind generation should be put back into a separate budget pot to maximise deployment.

Additionally emerging technologies such as floating wind and tidal stream projects should be supported to accelerate cost reductions and build up supply chains.

“This could be supported by clear MW and MWh targets and auction minima for these technologies in the upcoming auctions,” the letter said.

Finally, the letter recommends the government ensures that in future auction rounds, CfD parameters should reflect their economic environment more closely in terms of supply chain costs and interest rates.

“The methodology used to date has not provided enough transparency and reassurance to developers that the economic circumstances at the time of allocation will be appropriately factored into the auction process,” it added.

The trade bodies call for the definition of value to the consumer of the CfD to be “fundamentally reframed to reflect net zero targets”.

Renewable UK’s executive director of policy and engagement Ana Musat said: “The parameters set by the government for this summer’s clean energy auctions are incredibly tight, and could even fail to unlock investment in shovel-ready renewable projects.

“These projects would not only deliver lower bills and new jobs in the sector, but are critical for maintaining the UK’s position as a global leader in renewables. International competition for investment in clean tech has never been more intense, so ministers have to act quickly.

“Time is running out, not only to secure new renewable projects in the coming months, but also to set up a framework for the rest of this decade to ensure that longer term investments in manufacturing come to the UK instead of going overseas.”

There are a total of five timeline scenarios setting out the process for AR5, with each having a different end date.

Under Scenario 1, the shortest timeline, the allocation round would complete no later than 2 August this year.

However, Utility Week understands from industry sources that for AR5 the government is working towards for the Scenario 5 timeline, the longest out of the five. This means that the process will complete in late September at the earliest.