The UK Government’s Department for Business, Energy and Industrial Strategy (BEIS) today announced the results of its auction of “Contracts for Difference” (CfDs) to support renewable generation. Frontier has advised bidders in renewable auctions across Europe.
CfDs are financial instruments that entitle the winning plant to a stable price for their power. In this round, only CfDs for “less established” technologies (such as offshore wind) were auctioned, for projects delivering in 2021/22 or 2022/23.
Eleven projects were awarded CfDs, with the bulk of the capacity (over 3GW) accounted for by three offshore wind projects. The support cost for the successful projects is estimated at £170 million in 2022/23 (in 2012 prices), or 58% of the government’s available budget for that year. The clearing prices in the auction are significantly below the administratively-set reserve prices. Prices have also fallen substantially since the last auction: the Strike Price for offshore wind projects commissioning in 2022/23, at £57.50/MWh (in 2012 prices), is around half that awarded in the last auction for projects commissioning in 2018/19. If the projects are delivered at this price, this shows the potential for competition to help reduce the costs of decarbonisation to customers.
The auction results raise a number of questions:
- The auctions are relatively infrequent and the penalties for not delivering capacity are relatively weak. So should the auction process have aimed to make better use of the available budget, to help manage risks around achieving a decarbonised electricity mix?
- Offshore wind is treated as “less established”. Does this distinction make sense any more, and could even greater customer benefits be achieved if offshore wind were placed in direct competition for support with “mature” technologies, such as solar and onshore wind?
- Bidders are limited in the flexibility they can show around the pricing, capacity and timing of their projects. Might risk for bidders be reduced (and efficiency increased for Government) if participants could express a richer suite of preferences in their bids?
Frontier regularly advises clients on issues relating to energy, renewables and market design.
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