UK Government Responds on the Future of the CfD Scheme

On 18 October 2024, the Department for Energy, Security & Net Zero (“DESNZ”) published a summary of the responses (the “Consultation Response”) to the January 2024 Consultation on proposed amendments to Contracts for Difference (“CfD”) for Allocation Round 7 (“AR7”) and future rounds scheme (the “Consultation”). The Consultation ran from 11 January 2024 to 11 March 2024 and sought views on potential amendments to AR7 and future rounds of the CfD scheme, which supports renewable electricity generators. This is an update to the Consultation which we have reported on here.

We have set out below the key considerations and the government's response for each of the proposals considered in the Consultation Response.

Consultation on the Future of the CfD Scheme

Repowering – Eligibility Criteria

The Consultation sought views on whether onshore wind repowering projects should be allowed to apply for the CfD scheme under specific conditions. To be eligible, each repowering project would need to: (i) have reached the end of its operating life by the AR7 delivery years, (ii) incur high upfront capital costs similar to those of a new build, and (iii) be able to retain at least its current capacity over the term of the contract (“Repowering Eligibility Criteria”).

The government's final position is to implement its proposal to enable CfD support for full repowering projects from AR7 onwards. Following an assessment of the Consultation responses, the eligibility criteria has been revised to include a new condition: the technologies must already be eligible for the CfD scheme (as determined by the Repowering Eligibility Criteria). The government's assessment concluded that only onshore wind meets the eligibility criteria for repowering. Additionally, criterion (ii) has been amended to specify that projects must not be in receipt of any other subsidy for electricity generation at the time of application. The government has also removed the third criterion, so repowering projects will no longer be required to "at least retain current capacity" for the next allocation round.

Repowering – Forward Bidding

The government also consulted on its proposal to amend the CfD Regulations to allow forward bidding, which would enable a generator to apply for a CfD for the purposes of repowering while the original project is still operating. All respondents to the Consultation agreed that forward bidding would better enable repowering via the CfD.

The government proposes to allow repowering projects to forward bid for the CfD. However, due to the risks of speculative forward bidding and its potential to distort bidder behaviour, the government has decided to keep under review, for future rounds, the possible need to introduce further disincentives for speculative bidding.

Appeals

The Consultation sought views on the government's two-tiered appeals system for CfD Allocation Rounds, which risks delaying future allocation processes. The proposal aimed to streamline the appeals process, presenting three options: (i) retain the two-tier appeal process with a fixed timeline, (ii) change the grounds for appeal and block appeals on minor issues, or (iii) introduce a pre-qualification process with appeals prior to formal application.

In light of the Consultation feedback, the government does not intend to pursue the introduction of a pre-qualification process before the next allocation round, nor will it amend the grounds for appeal. The government acknowledges respondents' preference for implementing a fixed timeline for the appeals process and agrees that publishing a fixed timetable for the maximum duration of such processes would enhance clarity. The government plans to implement a fixed timeline for appeals starting in 2026 via legislation.

Phased CfDs for Floating Offshore Wind

The government proposed extending the CfD phasing policy, which allows projects to be built in multiple stages, to Floating Offshore Wind (“FLOW”) projects. This extension aims to reduce construction risks, improve the sector's commercial viability, and facilitate early development in the UK, similar to how phasing has benefited fixed-bottom offshore wind projects.

In its decision, the government agreed to extend phasing to FLOW projects in future CfD rounds, applying the current rules in place for fixed-bottom offshore wind.

Co-location Generation and Hybrid Metering

The Consultation sought views on the proposed hybrid metering approach, which would make it easier for CfD generators to co-locate with other assets while maintaining the integrity of the CfD scheme. This change aimed to address current metering challenges and enhance flexibility for renewable generation.

The government recognised that the majority of respondents broadly supported the proposal. It also acknowledged the complex challenges raised by some respondents, which need to be understood further before hybrid metering can be implemented in the CfD. The government's final decision is not to implement hybrid metering in the CfD until there is clarity on how such assets would be treated within the wider system. Therefore, hybrid metering will not be implemented for the next allocation round, and the need for future amendments will be considered in light of any broader market changes in this area.

Offshore Transmission Infrastructure

Bootstrap

The Consultation sought views on DESNZ's assessment that offshore renewable generation projects connecting to a 'bootstrap' should be eligible to apply for a CfD.

At present, the government cannot confirm that these projects will be eligible to apply for a CfD in the next allocation round. However, it will conduct further work to clarify the costs associated with bootstrap-connected projects and address the wider issues raised by respondents. This will inform a decision on whether any changes are necessary regarding the categorisation of these projects in future CfD allocation rounds.

Multi-purpose Interconnectors (“MPI”)

The Consultation sought views on DESNZ’s assessment of the role of CfD in the Home Market (“HM”) and Offshore Bidding Zone (“OBZ”) models. It also requested evidence regarding the additional costs and benefits to consumers of an Offshore Wind – Multi-Purpose Interconnector (“OWF-MPI”) arrangement, as well as opinions on other options that could better address the issues outlined in the Consultation chapter.

The government cannot commit to CfD eligibility or a specific CfD design for OWF-MPI projects until there is greater clarity on the MPI policy framework and the ongoing Review of Electricity Market Arrangements (“REMA”). It will continue to explore how the CfD could better support OFW-MPI projects that demonstrate good value for money for consumers and provide broader benefits to the energy system. Once sufficient clarity is achieved regarding the policy framework, the government will conduct a full assessment of the most viable CfD design option.

Innovation in Floating Offshore Wind Foundation Technology

The government sought views on gaming risks or unintended consequences that could arise from more precisely defining "established fixed-bottom" offshore wind for tariff eligibility, and whether other technologies should be considered as emerging foundation technologies. It also requested initial suggestions on defining metrics for 'established fixed-bottom' and minimum depth requirements for emerging foundation technology deployment.

The government is not currently proposing to make any changes for AR7, but it plans to continue reviewing this area and working with industry stakeholders through the Floating Offshore Wind Taskforce. Further consultations on this issue will occur before any potential future changes. The government acknowledges concerns regarding the expansion of access to the higher Administrative Strike Price for floating offshore wind to a broader range of eligible technologies. It recognises the challenges associated with defining established fixed-bottom offshore wind and determining a minimum water depth for emerging technologies. Nevertheless, the government believes it is important to develop a long-term solution for defining floating offshore wind that will not preclude CfD support for viable, innovative deep-water offshore wind solutions.

CfD Indexation and Inflation Risks

The Consultation sought views on DESNZ’s proposal to update the CfD indexation methodology to enhance inflation protection during project construction periods.

The government recognises that full CfD indexation to the Consumer Price Index (“CPI”) continues to offer relatively advantageous terms in an increasingly competitive global market. Therefore, it does not intend to make any changes to this approach at present. Reflecting on the significant concerns raised by consultees, the government will not consider proposals to index strike prices to the Producer Price Index at this time, as moving away from full CPI-linked indexation could significantly impact investor confidence. However, ahead of future allocation rounds, the government may further reflect on alternative approaches and priorities, including those suggested by consultees.

Conclusion

In agreement with those responding to the Consultation, the government will implement amendments to the CfD scheme ahead of AR7, specifically allowing repowered onshore wind projects that meet eligibility criteria to bid into the CfD scheme. The government will also extend phased CfDs to floating offshore wind projects. However, it will not introduce a pre-qualification process for appeals or amend the grounds for appeal for the upcoming allocation round, opting instead to establish a fixed timeline for future rounds. Additionally, the government will refrain from implementing hybrid metering until there is clarity on its treatment within the broader system. It will also continue to engage with stakeholders to define floating offshore wind projects and explore how the CfD can better support projects connecting to multi-purpose interconnectors/ or bootstrap infrastructure. Lastly, the government recognises the benefits of full CfD indexation to the CPI and does not intend to change this approach at present but will consider alternative options for future allocation rounds.