Three key takeaways from the UK’s renewables auction reforms
Miliband has approved radical changes to how the UK procures new wind and solar farms but has made important tweaks to most controversial reforms that were slated
Energy secretary Ed Miliband has approved a raft of changes to radically overhaul the UK’s signature Contracts for Difference (CfD) renewable energy auctions as he chases ambitious clean power targets. Here are three key takeaways.
The government yesterday announced the outcome of a consultation it carried out this year on proposals to try and turbo-charge its signature annual auction rounds.
There were 119 responses to the consultation from a mixture of companies active in the energy sector, including developers, generators and suppliers, along with trade associations, bodies and others.
The CfD system pioneered in the UK had propelled the country to being a global leader in offshore wind – but the system has delivered decidedly mixed results in the last three rounds, with the boom of 2022 followed by the bust of 2023 and a mixed bag last year.
Miliband will hope that the changes can help the government reach its ambitious targets of deploying 43-50GW of offshore wind capacity by 2030, up from nearer 16GW today, as it aims to all-but eradicate fossil fuels from the grid by the end of the decade.
Below are three key takeaways from the reforms the government has approved.
Miliband curtails ability to ‘peek’ at bids
This was aimed at avoiding a major offshore wind project missing out because awarding it a CfD would take the government marginally over its allocated budget.
This is because offshore wind projects are essentially ‘lumpy’ in CfD budget terms. There are very few of them, they are very big, and narrowly missing out could be the difference between a good auction and a bad one.
The government had therefore said it would allow Miliband to peek at certain anonymised bid information before setting the final budget, giving him more control over how much capacity he ultimately wants to procure.
But concerns were raised that this hugely altersthe auction dynamic. The government said in its announcement yesterday that stakeholders in the consultation had suggested Miliband only see offshore wind bids that breach a “pre-determined level.”
Miliband was persuaded and the government will now use this “partial visibility” approach for fixed-bottom offshore wind.
That means a budget will still be published “before the sealed bid window” and “only bid information on projects that breach the budget level” will be viewed by Miliband. A budget increase will also “only be considered if there is a benefit to consumers.”
Reacting on LinkedIn yesterday, Adam Bell, director of policy at consultancy Stonehaven, wrote: “These changes are very positive. In particular, returning to a CfD budget rather than a very vague ambition and restricting the circumstances in which the Secretary of State can peek inside the auction will make it much easier for bidders to use existing dynamics to evaluate their bidding strategies.”
“This materially derisks bids.”
Government ‘gambles’ on extending CfD terms
Another key change that Miliband has waved through, no doubt to the delight of developers, is extending the term of CfDs from 15 to 20 years.
The government said it had decided to revisit the term of CfDs due to “recent global cost pressures that have impacted all electricity generating technologies.”
Nick Civetta, senior advisory associate at Aurora Energy Research, said the extension of the CfD contracts will be "welcome news to developers, who have been looking for longer-term certainty against significant tail risk."
The government said the majority of respondents in the consultation responded that the new renewable electricity projects operating on a 15-year CfD would be exposed to greater market price risk. “Key considerations include longer asset lifetimes, significant increases in renewables deployment, and more frequent periods of negative wholesale prices.”
John MacAskill, group managing director of renewables at OWC, meanwhile wrote on LinkedIn that this five-year extension is “no minor regulatory tweak, it’s a structural shift with quite strategic implications.”
“Ed has decided to gamble all.”
The gamble, he said, is that with subsidy support now set to stretch beyond 2045, “if wholesale power prices drop, as the system decarbonises, the net subsidy burden on consumers could grow… not fall.”
The government admits that value-for-money benefits beyond 20 years were “not as strong,” he said, “so this opens a flank for those voices to attack.”
With Nigel Farage’s Reform party and even now the Conservatives increasing their attacks on “net stupid zero” – that avenue of attack could pose a real risk to Labour.
Unconsented projects allowed in – but only some
One of the most significant and controversial changes consulted on was whether to allow fixed bottom offshore wind projects that are not yet fully consented to enter the auction rounds.
The government said in its announcement that it had a “mixed” response to the proposal. It had also heard from stakeholders who worried of unconsented projects displacing consented ones and “unexpected bidding behaviour”.
It ultimately decided to push ahead with the proposal regardless, with the “primary rationale” to open the auction to more projects, “improving competitive tension.”
But it did say that it had “considered feedback” and agreed that allowing all unconsented projects in “risked insufficiently advanced projects entering the round.”
As such it has tightened the eligibility threshold, so that 12 months must have passed between the project reaching the relevant planning stage and the CfD application deadline.
For projects in England and Wales, the relevant planning stage is the Planning Inspectorate accepting a project's DCO application. In Scotland, it is when they have applied to the Scottish Ministers for any required Section 36 consent and marine licences, and public consultation commenced.
“Expanding the eligibility criteria for offshore wind could boost the total qualifying capacity by over 10GW,” said Hollister. “This increase in supply should help keep prices low,” even as the government aims to contract capacity that could be ready for 2030.
“By requiring projects to have been in the planning pipeline for at least 12 months,” the government can make sure that “only projects that have a good chance of being delivered will be able to enter, and therefore avoid inflating prices due to added uncertainty.”
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