In November 2018, the Department for Business, Energy & Industrial Strategy (BEIS) announced the third round of CfD allocations (AR3) for “less established technologies” – advanced conversion technology (ACT), dedicated biomass and offshore wind, and a separate pot for remote island wind projects.
The results of the third allocation round, announced in September 2019, demonstrated the rapid decrease in the cost of offshore wind. Nearly 6GW of capacity in the 2023 / 2024 and 2024 / 2025 delivery years was awarded CfD contracts with strike prices falling by 30% since the lowest strike price seen in the second CfD auction in 2017. As a result of the very competitive strike prices (below the wholesale electricity prices assumed in the auction), AR3 in principle had a neutral impact on the budget made available for CfD support.
Given that the CfD is the main method by which a project can achieve investment certainty, the continuing fall in prices and the dominance of large offshore wind projects demonstrates the sector’s confidence in being able to deliver profitable projects at prices almost on part with wholesale electricity prices.
These results are driven by improvements in technology and supply chains, and cost of capital make the technology less reliant on support mechanisms. Therefore, while fewer projects may be able to secure additional revenue support through CfDs, there is growing appetite for “subsidy-free” CfDs which offer the price stability but not the additional revenues.
In March 2020, the UK government published a consultation proposing a number of significant changes to the CfD scheme to apply to projects competing in allocation round four (AR4), scheduled to run in late 2021. BEIS published its response to the consultation at the end of November 2020, confirming the changes to be made for AR4 and future allocation rounds.
Of the changes to AR4, the most ‘headline grabbing’ was the UK government’s plans to restructure the budget allocation “pots”: this includes abandoning its opposition to subsidising new onshore wind farms and solar power projects, after withdrawing additional CfD support for both technologies in 2015, and the creation of a “pot 3” dedicated to fixed bottom offshore wind. Moreover, it was confirmed that a new definition and separate strike price will be introduced for floating offshore wind, which will continue to compete with other “less established technologies” (such as dedicated biomass with CHP) in “pot 2”.
Other notable amendments for AR4 that will impact all eligible bidders include the extension of negative pricing which had been introduced in AR3, the extension of the milestone delivery date to 18 months post-contract signature, and the intention to strengthen the supply chain plans for which an additional consultation has begun. For future allocation rounds, BEIS has also confirmed its will implement flexible capacity caps and that the current final legislative delivery year of 2030 will be extended to 2035, to enable the CfD scheme to run beyond 2026.