UK Government publishes updates to the Contract for Difference Allocation Round five

1. Introduction

On 14 December 2022, the Department for Business, Energy and Industrial Strategy (“BEIS”) published three key documents relating to the Contracts for Difference (“CfD") Allocation Round (“AR”) 5. This article summaries the changes proposed by:

1. AR5 Core Parameters, and
2. Administrative Strike Price (“ASP”) Methodology Note,

Changes proposed in the Draft Allocation Framework, and BEIS’s consultation on policy considerations for future rounds of the CfD (also published on 14 December), will be covered in separate articles. Whilst the AR5 proposals are subject to change, they provide a clear signal of the UK Government’s intent in respect of the forthcoming CfD allocation rounds.

Key points to note are:

• There will only be two pots. As such, fixed-bottom offshore wind and remote island wind technologies will, for the first time, be categorised in Pot 1, which has previously been reserved for established technologies such as solar and onshore wind; and
• Fixed-bottom offshore wind will now, for the first time, attract a lower Administrative Strike Price (“ASP”) than solar projects, which is reflective of the AR4 round results.

2. AR5 Core Parameters

2.1 Auction Pots

AR5 will consist of two auction pots comprising of 15 technology types:

1. Pot 1, Established Technologies: Energy from Waste with CHP, Hydro (>5MW and <50MW), Landfill Gas, Offshore Wind, Onshore Wind (>5MW), Remote Island Wind (>5MW), Sewage Gas, and Solar Photovoltaic (>5MW).
2. Pot 2, Less Established Technologies: Advanced Conversion Technologies (“ACT”), Anaerobic Digestion (>5MW), Dedicated Biomass with CHP, Floating Offshore Wind, Geothermal, Tidal Stream and Wave.

This represents the significant development of offshore wind technologies in the last CfD round and the reductions in costs achieved in the industry. However, there may be some concern that increasing price competition in Pot 1 could disincentivise investment in renewable technologies that have the potential to deliver the greatest amount of capacity and outs together projects which are otherwise significantly different. While Pot 1 grows in competition, there is greater opportunity for other emerging technologies like ACT, Geothermal, Tidal Stream and Wave to clear Pot 2. At present, there is no indication of ringfencing any budget for specific technologies (i.e., the setting of a minima and maxima within the Pot). If the Government opts to do so, this will be laid out in the Budget Notice, expected to be published next year.

2.2 Delivery years

Under the proposals for AR5, the delivery years will differ between Pot 1 and Pot 2. The delivery years will be:

Pot 1: 2025/26, 2026/27, 2027/28

Pot 2: 2026/7, 2027/8

2.3 Administrative Strike Prices

These prices are subject to the Final Budget Notice being published. The ASPs for Offshore Wind, Floating Offshore Wind, Geothermal and ACT are all lower than they were in AR4 whereas the ASP for Solar will be the same as in the previous allocation round. It is interesting to note in particular that Offshore Wind will now, for the first time, attract a lower ASP than Solar. Reflecting what was seen in the results of AR4, this indicates the significant developments in the offshore wind industry.

3. Administrative Strike Price Methodology Note

The ASP Strike Price Methodology Note provides insight into how the ASPs are anticipated to be calculated in AR5. The Methodology Note reports that Government identified several policy objectives at the outset of the scheme and these continue to frame the approach to setting ASPs in AR5.

In establishing the ASPs, BEIS seeks to balance the incentivisation of investment in renewable technologies with offering value for money for consumers. This is likely currently more challenging than ever as, while the levelized cost of renewable technologies has been reducing over recent years and wholesale electricity prices are high, inflationary pressures have led to far higher supply chain costs for developers, including commodities and labour.

As per previous rounds, AR5 will be held on a pay-as-clear basis, subject to no project receiving a higher strike price than its technology-specific ASP. ASPs represent the maximum strike price (presented on a price per MWh basis) that a project of a specific technology type can secure.

When setting the ASPs, BEIS considers multiple factors, including technology specific factors such as CAPEX and OPEX; financing and build constraints; market conditions including estimated wholesale electricity prices; and policy considerations, including the encouragement of low carbon electricity generation and costs to consumers.

With regards to technology specific approaches, the methodology for setting ASPs draws on BEIS’s latest view on generation costs to produce a modelled ‘supply curve’ for each technology in each delivery year. The supply curve represents the estimated volume of capacity in MW that could be built at different strike prices, ranked from cheapest to most expensive. For wind and solar technologies, a greater proportion of the supply curve is targeted than other technologies (i.e., the cheapest 50% of the supply curve, versus the cheapest 25% of the supply curve for other technologies). This approach is consistent with Government response to the AR4 consultation in November 2020, which expressed a need for greater flexibility when setting ASPs for specific technologies.

The ASP Strike Price Methodology Note also sets out the assumptions (and the key data sources informing these assumptions) on pre-development costs, construction costs, operating and maintenance costs, connection and use of system charges, load factors and efficiencies, and project timings which have informed BEIS’ latest views on electricity generation costs for the purposes of determining ASPs in this allocation round.

4. What’s next?

The final Budget Notice and application window dates are expected to be published in March 2023 Applicants will be informed as to qualification for the allocation round in May 2023. The auction process is expected to end no later than August 2023 with the contract signing window (4 business weeks) taking place at a time between July and September 2023.

We will be publishing a further article on anticipated changes to the Draft Allocation Framework and BEIS’s consultation (published 19 December) on proposed changes for the AR5 CfD Contract as well as a Law-Now on BEIS’s consultation (published 14 December) on changes to the CfD scheme for future allocation rounds.