All change for CfD regime: onshore wind and solar CfDs make an unexpected comeback and other extensive changes are proposed

March.06.2020

In a dramatic change of Conservative policy, the Department of Business, Enterprise and Industrial Strategy (BEIS) has launched a consultation proposing that “Pot 1” technologies (including onshore wind and solar) will be able to apply for Contracts for Difference (CfDs) when the next auctions are held in 2021. About four years ago, David Cameron’s government imposed a moratorium on Pot 1 technologies so this represents a reversal in the Conservative party’s position.

This will delight UK renewable developers who have struggled to build out projects under subsidy-free models since the moratorium was imposed. It is also likely to be welcomed by green campaigners; on the face of it this demonstrates just how far attitudes to climate policy have changed across the political spectrum and is evidence that the “net-zero” pledge not only has all-party support – it has government’s active attention.  

However, as always, the devil will be in the detail. Before developers rush for the champagne, it may be worth noting:

  • Government does not commit itself to much (other than some budget being available for Pot 1 technologies);
  • We don’t yet know how much capacity might be available for Pot 1 CfDs, or what minimum or maximum capacity thresholds might apply; and
  • No changes have been announced to planning restrictions – with the result that this may limit the locations in the UK where Pot 1 projects are feasible.

There are extensive other changes proposed, including:

  • a possible new "Pot 3" for offshore wind;
  • separate definitions and administrative strike prices for floating wind projects in Pot 2;
  • an end to support for coal-to-biomass conversions;
  • augmentation of "community benefits" framework to apply to all CfD technologies;
  • possible extension of Milestone Delivery Dates;
  • specific decommissioning obligations in the CfD;
  • enhanced non-delivery disincentive regime;
  • extending the negative pricing regime – so CfD holders will not be paid for any period of negative prices;
  • facilitating co-location of storage and renewables;
  • improved administrative strike price calculation which better reflects development costs; and
  • technical changes to auction rules which aid clarity.

This briefing looks at what has been announced, the missing details and what might happen in the Pot 1 CfD auction when it does occur and some of the other highlights of the consultation.

Pot 1 CfDs – a surprise announcement

BEIS published a document stating that Pot 1 technology projects will be permitted to apply for CfDs in the next auction round, which is to be held in 2021. This would allow new subsidised onshore wind and solar farms to be built by the middle of the decade.

The policy announcement posits that onshore wind and solar have, in recent years, become some of the most cost-effective forms of renewable energy. Government expects that these technologies will be able to secure CfDs at strike prices below the average expected wholesale price for electricity, and so over the course of a contract they may pay back as much, or more, than they receive in CfD top-up payments (based on current market forecasts).    

There were not many in the industry who anticipated this development at this stage. It is a surprise, but a welcome one, for UK renewables developers who have been hit by a series of adverse regulatory changes in recent years.

Missing detail on Pot 1 CfDs

We don’t yet know what the budget or size of the 2021 Pot 1 CfD auction will be, or what other parameters might apply (maximum or minimum capacities procured, any administered price levels). Already, there is speculation that the target capacity might be modest – with figures of 300-400 MW being mentioned by industry commentators. These are guesses at this stage but may serve to set the expectations of the industry.

Interaction with the planning regime

Whilst CfDs may be back on the agenda, the current planning regime will not be relaxed. This means that it will not become any easier for developers to have new projects approved (particularly English onshore wind projects). In addition, projects with existing planning permissions may be facing time limits and some may face a situation where planning permissions expire before the 2021 auction round (unless there are steps that can be taken to preserve the position). This could shrink the pool of potential Pot 1 CfD applicants.

Conclusions on Pot 1 CfDs

The details are still emerging, but it is possible to draw at least some conclusions:

  • There are likely to be a lot of projects seeking Pot 1 CfDs, with over 3GW of onshore wind projects alone that have grid connection agreements.
  • This could reinvigorate those industries. However, if the Pot 1 CfD auction is modest, then only the most technically robust projects are likely to get CfDs and pricing is likely to be very competitive.
  • CfDs for Pot 1 technologies are being seen by the government more as tools for revenue stabilisation, rather than subsidy.
  • It is more likely that onshore wind projects located in Scotland (rather than England) will be successful in any 2021 Pot 1 CfD auction. This is both due to the current planning regime and the fact that Scottish projects are likely to have the highest load factors and therefore be the most competitive projects.

Pot 2 CfDs and a new Pot 3?

A Pot 2 CfD auction is also planned for 2021 for less established technologies (which include AD, biomass, offshore and remote island wind as well as wave / tidal stream). For floating wind farms, which it is looking to encourage, BEIS is proposing a definition which is separate from offshore wind and its own administrative strike price.

Government is also considering a separate "Pot 3" specifically for offshore wind. It points to the challenges that arise from having a single Pot 2 because offshore wind is generally larger scale and lower cost than other technologies in that bracket.

Withdrawal of support for coal-to-biomass conversions

Although not unexpected – as support was always intended to be transitional – the government is now proposing to end support for coal-to-biomass conversions.

Augmentation of community benefits framework

BEIS is proposing that the community benefits framework – which currently applies to remote island wind–should apply to all CfD technologies.

Extension of Milestone Delivery Dates

BEIS notes that meeting the Milestone Delivery Dates can be challenging for some developers (and in particular notes the difficulties of the 10% spend route). Views are being sought regarding whether Milestone Delivery Dates should be extended.

Specific decommissioning obligations in the CfD

Increased offshore wind deployment means a greater risk to the taxpayer arising from being the "decommissioner of last resort" and costs could be significant. BEIS is proposing specific decommissioning obligations be included in the CfD (which would apply in addition to the existing decommissioning regime in the Energy Act 2004).

Enhanced non-delivery disincentive regime

Projects that miss their milestones are currently excluded from future CfD allocations for a 24-month period. BEIS is proposing several enhancements including an extension of the exclusion period to 36 months (or potentially even longer). Given that the government has made a commitment to hold CfD auctions every two years to 2030 this will mean that the project is ineligible for at least one allocation round.

Bid bonds are also being considered (either in addition to or instead of the extension of the exclusion period mentioned above), with the suggestion being that the requirement is £10,000 per kW. Bid bonds would be forfeited in the case of non-delivery. This would track current requirements for Capacity Market participants.

Government is also considering whether different forms of disincentive are needed for technologies at different levels of development and is asking for views on how such a regime might work.

Extending the negative pricing regime

Under the current CfD, CfD holders will not be paid differences payments if negative pricing occurs for six consecutive periods. The new proposal is that CfD holders should not be paid in any hour where there is negative pricing (to disincentivise generation when the system is oversupplied).

Facilitating co-location of storage

The consultation is seeking views on what changes are required to facilitate the co-locations of battery storage projects and renewables.

Improved administrative strike price calculation and technical changes to auction rules

BEIS is aiming to improve the way the administrative strike prices are set. The driver here is to achieve a better alignment between administrative strike prices and development costs for each technology. In addition, a host of technical changes and minor modifications to the auction process have been proposed, mainly with the intention of improving clarity.

Next steps

Stakeholder engagement is planned on the extensive changes being proposed. The consultation will close on 22 May 2020.