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:
There are extensive other changes proposed, including:
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.
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.
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.
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.
The details are still emerging, but it is possible to draw at least some conclusions:
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.
Although not unexpected – as support was always intended to be transitional – the government is now proposing to end support for coal-to-biomass conversions.
BEIS is proposing that the community benefits framework – which currently applies to remote island wind–should apply to all CfD technologies.
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.
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).
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.
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).
The consultation is seeking views on what changes are required to facilitate the co-locations of battery storage projects and renewables.
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.
Stakeholder engagement is planned on the extensive changes being proposed. The consultation will close on 22 May 2020.