Energy UK has urged the government to hold Contracts for Difference auctions on annual basis to plot a smoother trajectory to reaching net-zero emissions by 2050.
The trade association said yearly auctions would have a number of benefits, including easing pressure on environmental and planning authorities as developers would no longer need to rush applications to fit the current biennial cycle.
Responding to a consultation on proposed changes to the scheme for the fourth allocation round in 2021, Energy UK said annual auctions would reduce the risk of projects being “sterilised” if they are unsuccessful in an auction and their consent or lease expires before the next.
They would also lower costs by de-risking projects for investors and ending the boom and bust cycle for the supply chain, which would be better able to plan ahead and buy in bulk. There would be a similar effect on the labour market, reducing the need to employ foreign workers for specialist jobs.
“There is sufficient liquidity in the market to enable annual auctions,” it argued. “Government can use proportionate capacity caps when required to retain competitive tension but at sub-£40/MWh, prices are reaching a point where cost reduction will be less relevant than the need to deliver the maximum capacity required to meet the UK’s net-zero targets and place the necessary focus on supply chain growth.”
The organisation quoted analysis from the University of Oxford’s Institute of Energy Studies which stated that annual auctions would additionally improve price discovery for bidders: “Basically, we can see that the updated information on technology costs becoming available in each year leads to lower overall bid prices when it can be directly incorporated into participants’ bids.”
It said the auctions were originally envisioned to take place on a six-monthly or annual basis: “A two-year schedule is the divergence, not the other way around.”
Technology pots
In March, the Department for Business, Energy and Industrial Strategy (BEIS) announced plans to allow onshore wind and solar to bid for the first time in more than half a decade as part of a “pot 1” auction for more established technologies. It said there would also be an auction for less established “pot 2” technologies, and to stop it taking over this pot, perhaps a third specifically for offshore wind.
Energy UK embraced the decision to readmit onshore wind and solar, saying wholesale prices and power purchase agreements had failed to deliver capacity on the scale necessary to meet the country’s climate targets.
It said the introduction of a separate pot for offshore wind would also enable pot 2 to “return to its original focus on innovation and allow other technologies the opportunity to experience a similar price discovery to that seen in offshore wind.”
But the trade body added that whilst this pot structure will be an effective way of bringing forward a diverse mix of technologies, the subsequent selection of budgets, caps and other auctions parameters will be just as important as the “headline decisions” as to which technology goes in each. It asked ministers to “share details” as soon as possible so the industry can give an informed response to the proposals.
The road to net zero
More generally, Energy UK urged the government to provide “as much transparency and forward clarity as possible”, publishing a roadmap for the scheme out to at least 2030: “To date the CfD framework has been somewhat undermined by the absence of a procurement strategy and the influence of politics. A clear procurement strategy would instil confidence in investors, the supply chain and reduce the likelihood of political disruption, all of which would increase the UK’s chances of reaching its low-carbon targets.”
It said building up to 35GW of onshore wind as the Committee on Climate Change has suggested may be necessary by 2035 will require the fourth allocation round to have a minimum capacity cap of 4GW, or 2 to 3GW if auctions were to held on annual basis. “We believe that any capacity caps limit deployment and if applied to future auctions should be directly linked to carbon budgets and updated on an annual basis depending on what is required.”
Energy UK said ministers should have little to fear from being ambitious and plenty to gain: “The fact that the results of allocation round three had zero impact on the monetary budget implies that the contracted capacity is expected to be brought forward at zero cost to consumers. Given the impact that the Covid-19 pandemic has had on the UK economy, the opportunity to bring forward further low carbon capacity at zero cost to consumers is one that must be taken.”
As part of its consultation, BEIS proposed to extend the delivery years specified in the CfD regulations to 2030. Whilst acknowledging that this is only an administrative matter, Energy UK said they should be extended to at least 2035 and ideally into 2036: “Extending the delivery years to 2036 is a no-regret ‘low-hanging fruit’ for government with regards to strengthening investor confidence in the UK, which is essential for any economic recovery.”
Floating wind
The government additionally proposed to allow floating wind to enter the pot 2 auction with its own administrative strike price. Energy UK welcomed the proposals but cautioned that significant volumes are unlikely given the timing of the ScotWind leasing round. It said the department should be mindful that only demonstration projects are likely to come forward and budgets and caps should be set accordingly.
It recognised the need for an appropriate definition for floating wind to prevent gaming by developers, who may convert fixed foundation projects to take advantage of higher strike prices or ring-fenced capacity, but said it should not be too strict to begin with: “Introducing a depth limit now would restrict the ability for demonstration projects to access CfD support.
“These projects are typically positioned in shallower waters to demonstrate technological readiness ahead of commercial scale rollout in deeper sites. Therefore, placing a limit on depth now may inadvertently slow the pace of development of floating wind technology.”
It urged the government to seize a first-mover advantage in this nascent market, highlighting the significant export opportunities to the many countries around the world that, unlike the UK, lack access to shallow waters.
Many of the views expressed by the trade association were shared by the not-for-profit energy consultancy Regen, which has also published its response to the consultation. It likewise called for annual auctions with “transparent capacity and budget caps which align with net zero.”
Regen agreed that offshore wind should get its own pot and that floating wind should introduced to pot 2. It also thought it a mistake to define floating wind by depth.
It addition, the organisation called for “ambitious targets” in England to have a percentage of generation that is either locally or community owned, in the same way as in Scotland and Wales.
Negative Pricing
Both Energy UK and Regen expressed concerns about the government’s proposal to prevent new contract holders from collecting top-up payments during periods of negative pricing.
Energy UK said it supports the intention to prevent renewables from continuing to generate when they are not required but warned that leaving the growing but hard to predict risk of negative pricing entirely on generators shoulders could unsettle investors and increase financing costs: “It may be less costly overall if some or all of the risk is taken by consumers, who are the ultimate counter-party in the CfD.”
It said another option would be to phase in the change: “For example, the current rule specifies that CfD payments are halted after 6 consecutive hours of negative pricing have occurred. This 6-hour period could be reduced to 3 hours as a first step in extending the negative price rule.”
Regen agreed that it would deter investors and added that it would also “create a major market distortion between those CfD holders that are subject to the rule and those that are not.”