Following the competitive auction process, the long-awaited second round of Contracts for Difference (CfD) allocations was published by the Department of Business, Energy and Industrial Strategy (BEIS) in September. The Government’s announcement sparked debate about the future of the energy sector and the mechanisms in place to shape it.
Offshore wind was the clear winner of the day. BEIS awarded three of the eleven CfDs to offshore wind projects – Triton Knoll, Hornsea Project 2 and Moray East – with a total of 3.2 GW of capacity. It means that an outstanding 96 per cent of the total capacity in this CfD allocation round was awarded to offshore wind projects.
And this comes as no surprise. The low strike price of £74.75 for delivery year 2021/22 and £57.50/MWh for the delivery year 2022/23 is a testament that offshore wind can deliver record low prices, but reductions in strike price of up to 50 per cemt compared to the first allocation round were a lot lower than the industry had predicted. It’s worth noting that this general downward trend of incentives support follows recent tenders in Germany, Denmark and the Netherlands.
While it was really good news for the offshore wind sector, the latest round of allocations also raised concern around how appropriate the CfD incentive mechanism is to bring less mature technologies such as wave, tidal & tidal stream to market.
Today, such technologies simply can’t compete on costs with more established technologies – arguably including offshore wind, following this latest announcement. It remains to be seen whether a fairer playing field will be created in the future for such less mature technologies, for example by creating a separate ‘pot’ or by ring-fencing capacity allocation within an existing eligible technology ‘pot’.
Of the £290 million allocated to this allocation round, only £176m was actually utilised. That’s barely 60 per cent, leaving a hefty sum of £114m untouched. The allocation decision of the underutilised funds is likely to rest with HMT and whether or not such funds may be rolled over into a future CfD round remains to be seen.
There are indications that a third CfD allocation round is likely to go ahead – but at the time of writing, no date has been confirmed.
The Government has a real opportunity here to cement its position as a world leader in offshore renewable energy by providing clarity for offshore development beyond the past CfD allocation rounds and for future years to come. This extends to future deployment of renewables around UK coastal waters – for example opportunities in the Bristol Channel and the Irish Sea.
Currently, we are waiting on a handful of key documents that should shed some light on this. These include Professor Dieter Helm’s report of energy costs, the Government’s Clean Growth Plan to set clear policy direction towards smarter, more flexible and renewable energy generated system, as well as the Industrial Strategy. All three are expected to be released prior and reflected in the Autumn Budget in late November – and will hopefully bring greater clarity on the future of the low carbon framework and carbon pricing.