The government’s £22 million increase in the budget for the next Contracts for Difference (CfD) allocation round does not go far enough to restore confidence to renewable developers hit by soaring costs.
This is the view of experts responding to the announcement on Thursday (3 August) by the Department for Energy Security and Net Zero (DESNZ) that the budget of the flagship renewables scheme is increasing to £227 million.
This will come in the form of a £20 million increase to pot one, which includes established technologies such as wind and solar, and £2 million to pot two, which covers emerging types of generation, such as floating offshore wind.
DESNZ said the move would send a “powerful signal” to the industry and increase developer confidence in the sector.
However, experts including Aurora’s Ashutosh Padelkar dismissed this claim, citing Vattenfall’s decision to abandon its Norfolk Boreas offshore wind project as an example of the pressures developers are under and the need for more radical steps.
Padelkar told Utility Week: “The government is clearly trying to instill confidence because they have had a major project pull put. But this is too little, too late.”
Padelkar, a research associate at Aurora, said allocation round 5 of the CfD scheme should follow more closely in the footsteps of the previous round, which saw 11GW of low-carbon generation secure contracts at a record-low strike price of £37/MWh.
He estimated that because offshore wind capture prices are consistently above the CfD strike prices the government is likely to earn between £4 billion and £5 billion from this previous allocation “as a result of providing what it calls a subsidy”.
However, he pointed out that for this round, the first of the annual CfD auctions, the administrative strike price (the maximum strike price a particular technology can achieve) has been reduced. This is at the same time costs to developers are estimated to have risen 20% – 40%.
Padelkar said: “Developers are telling me ‘we just can’t make it stack up with these prices’. Changing the administrative strike price would have had a greater impact than the increase to the overall budget announced today.”
George Day, senior advisor on net zero policy at the Energy Systems Catapult, shared similar concerns with Utility Week, saying any increase was welcome but that this was a “short term incremental move and shows the limitations inherent in central government playing such a central role in procuring the net zero generation mix”.
He added: “This creates an unhealthy game of uncertainty and lobbying around each auction round between government and the industry.
“We need to create a long term and market-wide framework that strengthens the demand pull for the full mix of resources needed to deliver a net zero electricity mix. This will create the long term pull that will shape the supply chains and innovation that we need. We support the direction of travel in the ESO’s Net Zero Market Reform project on this.”
Energy UK’s deputy director Adam Berman also gave a caveated welcome to the move, saying: “Industry has been clear that an insufficient budget and poorly designed price mechanisms would result in a disappointing auction result – so an increase is a step in the right direction. However even this expanded budget remains almost £40 million less than that offered in last year’s auction.
“While the budget increase is a positive development, it falls short of addressing the more fundamental problem – that the CfD regime no longer offers financially sustainable prices.”
Results for allocation round 5 of the CfD are expected in September.