Widening CfD criteria may trigger ‘fundamental overhaul’

Changing the Contracts for Difference (CfD) auction process to give weight to non-price factors may require a “fundamental overhaul” of the renewable energy support mechanism, the government has said.

Including non-price factors – such as infrastructure investment and strength of supply chains – has been mooted as a means to strengthen the CfD auction process.

However, the Department for Energy Security and Net Zero (DESNZ) has suggested that doing so may require a complete rethink of the support mechanism.

The statement is made within the government response to its recently conducted call for evidence on how non-price factors could be introduced into the process for awarding CfDs.

The response has appeared on the same day that the results of the latest Allocation Round have been revealed, with no bids registered for offshore wind projects.

Under the current CfD regime, the 15-year contracts are awarded to the lowest priced bidder via a process of competitive auctions.

However the government has come under pressure to take non-price factors into account.

The call for evidence presented a series of models for how non-price factors could be integrated into the CfD process. These include reflecting non-price factors either through a “top-up” to the CfD strike price or taking them into account when ranking auction bids.

The government response says that the CfD “top-up” would enable auctions to be run exactly as they are now, with no change to the bidding process.

It says further analysis could be undertaken on the potential size of top-ups, which should be proportionate to the extra cost of undertaking a particular action.

Changing the CfD bid ranking rules would make it possible for a project scoring sufficiently highly on non-price factors to win a contract ahead of another scheme bidding into the auction at a lower strike price.

However this option may result in “unintended consequences”, especially due to the current pot structure of CfD auctions, which may be harder to mitigate than in the top-up model without “fundamentally overhauling” the entire process, it says.

A third option to amend the CfD valuation formula would significantly increase the complexity of the low carbon auction power process. However the government said that this could result in greater difficulty when planning and setting auction budgets.

The response says that the government will limit non-price factors to be taken into account to supply chain sustainability, capacity building, skills and innovation.

Other non-price issues relating to system flexibility, operability and locational signals, may not be best addressed through the CfD auction process.

It adds that support should be focused rather than being diluted across too many issues, such as biodiversity, which may be best dealt with at earlier stages of the development and consent cycle.