On 24 November 2020, the Department for Business, Energy and Industrial Strategy (BEIS) published the consultation decision on the proposed amendments to the Contracts for Difference (CfD) Scheme. The fourth allocation round (AR4) of CfD will open late next year, and BEIS has announced an expansion of the CfD scheme to a capacity of 12GW, more than doubling the 5.8GW offered at AR3 in 2019.
Policy developments for AR4 and beyond
The pots for AR4 have been structured as follows:
- Pot 1 (established technologies): Onshore wind (>5MW), Solar Photovoltaic (PV) (>5MW), Energy from Waste with CHP, Hydro (>5MW and <50MW), Landfill Gas and Sewage Gas.
- Pot 2 (less established technologies): ACT, AD (>5MW), dedicated biomass with CHP, floating offshore wind, geothermal, remote island wind (>5MW), tidal stream, wave.
- Pot 3 (offshore wind): offshore wind.
A new third pot has been introduced in AR4, ring fencing offshore wind into its own class. This treatment marks a coming-of-age for a technology that arguably no longer deserved to be categorised as less established. It also addresses a perceived distortion in the allocation system from the previous two rounds. In each instance only technologies deemed less established (i.e. "Pot 2") were entitled to bid. This placed offshore wind in the same pot and in direct competition with smaller scale and more nascent technologies. The result in the third round was that nearly 95% of CfD awards by megawatt were allocated to offshore wind.
The previous two allocation rounds have also not seen any budget allocated to the "Pot 1" established technologies – which covered both onshore wind and solar PV. Although it is not clear what budget will be allocated to this pot in AR4, they will at least be entitled to participate. This is an interesting development as the costs of establishing onshore wind and in particular solar PV projects have fallen dramatically in recent years.
Floating offshore wind
Floating offshore wind has been defined as a distinct technology (with a distinct administrative strike price) from fixed offshore wind, and located in Pot 2. Additionally, the minimum water depth criterion for FOW has been reduced from 60m to 45m, in order to incentivise developers to use the shallowest sites for cheaper projects.
We note that government projections indicate that around 1/40th of new offshore wind developments by capacity will be floating by 2030. This is fairly ambitious as the UK only has a single demonstration project currently in operation.
Coal-to-biomass conversions have been excluded from AR4 onwards. The decision therefore implies – perhaps unsurprisingly – that the few remaining coal units will not be making this transition. Whist these were entitled to participate in AR1 none of these plants have been successful since Drax was awarded a Final Investment Decision Enabling contract in the pre-AR1 process.
The Government is, however, developing a new Biomass Strategy (to be published in 2022), that will look at how biomass should be sourced and used across the UK economy to best support net zero efforts.
The Government sought views on whether to update the current Community Benefits and Engagement Guidance for onshore wind. Many such projects find it challenging to get past the planning permission phase, given the need to demonstrate community support. WBD have had recent success with an onshore wind project near Bristol.
The Government is to update the Community Guidance, with the intention of publishing in Summer 2021. Whilst this may be positive news in principle it remains to be seen how stringent the new guidance is and whether it creates a more favourable investment climate for developers.
Supply chain plans
The Government sought views on whether its Supply Chain Plan policy was sufficiently structured so as to harness the power of the green economy in sparking innovation, driving regional growth, and achieving net zero. As with prior rounds, projects bidding with a capacity of 300 MW or more will need to submit a supply chain plan. This is designed to ensure a balance between using best in class suppliers from across the world, whilst also ensuring as much investment as possible is retained within the UK economy. New to AR4 is a proposed requirement for developers to update the government on progress against their plan.
An additional £160m in funding will be released for ports and infrastructure, to support the growth of an internationally competitive manufacturing UK supply chain.
A further consultation is underway with details expected in due course.
The proposed changes for AR4 and beyond aim to achieve a more level playing field, and ensure only competitive and relevant technologies receive government backing.
It remains to be seen, however, whether the price certainty offered by a CfD, so valuable for investors, will offset the potential for wasted costs in meeting CfD criteria and preparing sealed bids at auction – particularly for smaller scale technologies. Some onshore wind and solar projects may well opt not to participate in the process. We also await details of the overall budget allocation and how this is to be split between pots. At the moment investors, financiers and developers have little forward guidance as to which technologies are likely to be favoured, other than offshore wind which may well dominate again. If that is the case, the capacity cap is more likely to apply than the budget cap.