More than a year after the Contract for Difference (CfD) regime1 was instituted — courtesy of the 2013 Energy Act, the UK Department of Energy and Climate Change (DECC) has released the results of the first round of the Contracts for Difference allocation.
According to the DECC, Contracts for Difference (CfD) were awarded to the following: two offshore wind farms (one in England and one in Scotland: East Anglia Phase 1, and Neart na Gaoithe, a total of 1162 MW capacity); fifteen onshore wind farms across England, Scotland and Wales, which equated to a total of 748.55 MW capacity; five solar projects ranging from 12 to 20 MW; a pair of combined heat and power projects accounting for nearly 100 MW; and a trio of “advanced conversion technologies” totaling 62 MW. The outcomes show that 2.1GW of capacity has been procured, at a total cost this round of £315million.
For RenewableUK, the trade and professional body for the UK wind and marine renewables industries, the news is welcomed. “We are pleased to see these projects, which between them could power over 1.2 million homes and create substantial numbers of jobs as well as much-needed investment in our communities,” Maria McCaffery, RenewableUK chief executive.
The contracts were awarded to the two offshore wind farms entail strike prices varying between £114.39 and £119.89 per MWh. Meanwhile, contracts awarded to the fifteen onshore wind farms entailed average strike prices for each year varying between £79.23 per MWh and £82.50 per MWh.
According to RenewableUK, the highly competitive prices achieved during this first auction highlight the fact that the industry has been working hard to bring costs down, both onshore and offshore. “The prices achieved by the onshore industry show what utter folly it would be to choke off this low cost form of low carbon power,” McCaffery said. Furthermore, the results demonstrate that the offshore industry — provided the conditions are maintained — is well on the path to achieving its stated aim of £100/MWh by 2020.
Executive at RenewableUK are not the only ones applauding the results of the first CfD Auction.
Gina Hanrahan, climate and energy policy officer for WWF Scotland, called the DECC’s results an “important milestone for the renewables industry, providing clear evidence that these technologies are rapidly reducing their costs in a competitive process.”
In particular, Hanrahan noted, onshore wind and solar are now significantly cheaper than nuclear power, while offshore wind has also cut costs substantially.
Niall Stuart, chief executive of Scottish Renewables, was particularly pleased that two-thirds of the UK onshore wind projects awarded in this auction round will be constructed in Scotland, with the technology now around 10% cheaper than new nuclear power. More importantly, 11 of 27 renewables projects which will receive a contract for the electricity they produce are in Scotland, and (when complete) will generate enough energy to power the equivalent of more than 600,000 homes.
“We are pleased to see one Scottish project offered a contract in this process, Stuart said. “With Neart na Gaoithe and the Beatrice development in the Moray Firth, we now have just over 1GW of offshore wind in Scottish waters with funding secured and moving towards a final investment decision. This represents a significant volume of projects with the potential to really kick-start offshore wind in Scotland.”
But Scotland’s offshore wind ambitions go far beyond this, Stuart stressed. By his count, there remains almost 3GW of projects with planning permission which will still be looking to secure contracts in the future. Together they could create more than 10,000 jobs during construction and upwards of £2 billion in GVA. For these projects, the focus is now on the next auction, which is likely to start within the next 12 months.
“Yet we still have no indication of the size of the budget that will be available and competition for support could be even tighter,” Stuart noted. “It is essential DECC gives some clarity on this as quickly as possible so that the projects, and the supply chain, can plan their future.”
More work to be done
While the majority of those Scottish developers who benefitted from the CfD awards appreciate the accomplishments, some point to some shortcomings in the programme. Case in point is Infinergy,2 which secured contracts for both its 177MW Dorenell Wind Farm and its 39MW Tom nan Clach Wind Farm in Scotland at a level of £82.50.
As Esbjorn Wilmar, Infinergy’s managing director, put it: “We are content that we secured CFD’s for both our Scottish projects, Dorenell and Tom nan Clach; Infinergy can now move forward delivering these projects. And we agree with DECC that the auction outcome delivers a good result for the consumer. However, both our projects benefit from high wind speeds and economies of scale and might therefore not be representative for the onshore wind industry as a whole. We also note that the majority of eligible projects did not secure a CFD. As a consequence a large pool of consented renewable energy projects will be unable to progress, not fulfilling the full potential of renewable energy in the UK.”
Executives at the Renewable Energy Association (REA) are taking a similar view. While the association said it “welcomes the fact that a key component of electricity market reform and renewable energy policy has now been delivered in line with the intended timetable following several years of development,” some issues still exist.
Among the items on REA’s list:
- No resources have been allocated to converting coal-fired power stations to clean biomass sources (‘biomass conversions’), a quick to deploy, cost-effective method of securing large amounts of flexible capacity at a time when the UK faces a potential generating shortfall in the short term and having contracted such significant amounts of fossil fuel generation in the Capacity Market.
- More budget allocated to higher cost renewables than to the cheapest.
- More frequent allocation rounds are vital to the industry’s ongoing health as annual rounds create huge uncertainty,
- Revised application criteria and a range of measures to simplify the process for all companies are necessary to streamline the policy.
“We have longstanding concerns regarding the CfD policy and are engaging with Government on these in the lead up to future allocation rounds,” said Dr Nina Skorupska, REA’s chief executive. “Today’s results show many of these concerns are still valid, for example, regarding emerging technologies. That said, it is positive that a wider spread of technologies than anticipated was awarded contracts.”
If REA has one overarching message to Government, Skorupska said it would be that “industry needs a stable policy framework in the coming years, and that energy is too important to play politics with at the coming election.”
In that same vein, RenewableUK’s McCaffery stated that there remains a lot of work to be done to ensure that developers remain committed to the UK market, bringing forward much-needed power, and economic benefits. The next round of auctions, she said, is due to take place in the autumn of 2015. As such, McCaffery warned that all political parties aiming to be in Government needed to consider how these should function.
“It is vital that the new Government moves quickly to clarify process around the next awards,” McCaffery stated. “A level of certainty about both immediate future allocation rounds, but also the long-term vision of decarbonised electricity — and the support needed for it — will ensure projects keep coming forward, at the right price. The industry has really extended itself today on the cost reduction agenda, and Government needs to respond positively with a clear signal about future rounds and long term support, to enable the continued development of low carbon power at a good price.”
Some industry observers, including those representing the solar sector, are taking a harder line as it pertains to the results of the first CfD Auction and what’s needed moving forward. One such individual is Paul Barwell, CEO of the Solar Trade Association, (STA), who described today’s results as “disappointing but predictable.” His feeling is that the most popular (and soon-cheapest renewable offering) loses out in a scheme which he believes favours big players.3
Specifically, Barwell points to the fact that solar has only won five contracts out of 27 (or less than 20%), with only two to be built the coming financial year and three in the next. (By comparison, onshore wind has won 15 contracts.)
“The results are disappointing for solar, but not surprising and come as more and more analyses shows that, as long as it is given stable support, solar could very soon be competitive with fossil fuels without subsidy,” Barwell explained. “However, the UK utility solar industry is very young in the UK and it is almost — but not quite — ready to compete with technologies that have been established for over a decade.”
Barwell goes on to say that it is likely that very few solar companies even submitted a bid for a contract. The problem, he says, is that it was just far too much of a risk for a small or medium sized solar company to even put in a bid for a Contract for Difference. “The system was a bit like asking first-time buyers to put down on deposit on a house, without knowing whether they were going to be able to buy the house at the end of the process – and with the risk of losing their deposit,” he explained.
In illustration: solar, onshore wind, landfill gas and hydropwer were competing for contracts within the £50m (+£15m) budget available for ‘established’ technologies. Technologies categorized as ‘less mature’, such as offshore wind, competed in a separate auction.
In short, according to Barwell, the CfD results means that contracts enabling just 32MW of solar, enough to power 7,000 homes, will be built in the next financial year– even including sub 5MW solar, this represents a huge drop in the market compared to the current financial year when 2-3GW of large-scale solar is estimated to be built. Solar farms above 5MW (about 30 acres) are particularly exposed, as the Government will close the current Renewables Obligation system to these solar projects alone – but leave it open to all other technologies until 2017.
Alex Fornal, head of project development at Juwi, which made three competitive bids said, summed it up this way: For us the results speak for themselves. Wind has apparently taken all or most of what was an already a miniscule CfD budget. If there were any successful solar farms they have taken up whatever crumbs were left over after wind projects were granted CfDs.”
Both Barwell and Fornal are hopeful that the next government will apply what they are calling “a more sensible budget” to the next allocation round this coming October — a budget that is fit for purpose and that provides the support for solar that it deserves. If properly supported, they say, solar will become the first renewable to compete with conventional generation and reach grid parity by the end of this decade.
“Much more care needs to be taken by Government about where its energy policies are leaving solar power overall,” Barwell stated. “This extraordinary technology has been the success story of the Coalition Government, but it is in danger of falling through the gaps in a policy framework too often designed for really big players deploying big technologies. Internationally, Governments are recognising and supporting solar’s vast global potential. Having come from nowhere on solar at the start of this Parliament the UK cannot afford to fall behind.”
Advocates of competitive forms of renewable energy are also looking for more guidance from Government. As Gina Hanrahan of WWF Scotland stated: “To ensure the continued growth of the offshore wind industry, attract supply chain investment, and continue to bring down costs, the next UK Government must provide a stable and sustained funding pipeline for offshore wind and clear volume signals in the 2020s. We’re calling on all political parties to make the growth of our offshore wind sector a key plank of their energy vision.”
For the time being, all eyes are on the second round of the CfD Auction, which is expected to be announced in the fall.
“What the renewables industry needs now is to know what the budget for the next auction rounds will be,” said Scottish Renewables’ Stuart. “That information — coupled with an extension of the government’s commitment to renewables out to 2030 – would give developers the certainty to secure private finance to build their projects.”
A complete, detailed list of the projects that received CfD awards in the first round is available online.
REFERENCES
- The Contract for Difference regime, instituted by the 2013 Energy Act, gives renewable power developers contracts detailing a set amount – or “strike price” for each megawatt hour (MWh) of power they produce. Developers are given a guarantee that they will receive this price for each megawatt hour for fifteen years of operation.
- Infinergy started developing onshore wind farms in the United Kingdom in 2003. Its current focus is the UK, where wind resources are considered to be one of the most promising forms of sustainable energy.
- Contracts for Difference are the new support mechanism for nuclear, CCS and renewable energy introduced by the Coalition Government to replace the main support for large-scale renewables, the Renewables Obligation. The auction, held earlier this year, required ‘established’ renewables to compete with each other directly for a share of £50m for the next year (and an additional £15m for later projects). Source: Solar Trade Association.