Consultation: Considerations for future Contracts for Difference (CfD) rounds

• United Kingdom

• Energy and infrastructure - Clean energy

16-12-2022

On 14 December 2022, the UK Government published a new consultation - “Consultation on policy considerations for future rounds of the Contracts for difference (“CfD”) scheme” (Consultation) on the CfD scheme, which supports renewable electricity generation projects in Great Britain.

The Consultation is inviting views and evidence on potential changes for Allocation Round 6 (AR6) and future rounds beyond that. It also provides several policy updates. It closes on 7 February 2023, with a Government response intended sometime later in 2023.

Simon Davies comments: “There are some interesting issues addressed in this consultation, particularly for the offshore wind industry in relation to phasing, floating offshore wind and private wire supply of offshore oil and gas facilities. However, these are quite specific proposals and the broader CfD policy is still subject to ongoing review of future market arrangements as part of the REMA programme. The policy update at the back of the consultation indicates that the Government is keen to ensure that CfD contracts do not create perverse economic incentives for inefficient operating behaviour in the context of the broader system, whilst recognising the success of the scheme to date. Investors in UK renewables will be keen to understand the role that CfDs will play in the medium to long term in terms of providing revenue certainty and lower cost of capital.”

Set out below is a summary on the key areas of the Consultation.

1. Considerations for AR6 
   

   Private Network Arrangements

   The Government proposes to make electricity supplied over private wire to offshore oil and gas facilities ineligible for CfD payments from AR6 onwards, and is seeking views on this under the Consultation.

   The Government expects there to be increased demand for the use of private network arrangements within the CfD Scheme for the electrification of offshore oil and gas facilities. The Government is of the view that this could increase the cost burden for household energy bills without any corresponding benefits.

2. Consideration for future CfD Allocation Rounds
   

   The following are proposals not currently intended to be implemented in AR6 but will help inform policy decisions for future CfD rounds. The Government is seeking views on the following:

   Defining Floating Offshore Wind

   Whether to change the regulatory definition of ‘floating offshore wind’ under the CfD regulations (together with the publication of accompanying guidance listing eligible technology types) in light of concerns that the current definition may exclude new and innovative foundation designs from CfD eligibility in the floating offshore wind category.

   Offshore coordination

   As part of the Offshore Transmission Network Review (OTNR), the Government is considering the role of a regulatory framework around “multi-purpose” or “hybrid” interconnectors. This consultation also considers whether to make (and what changes would be necessary to make) offshore wind farms connected directly to such interconnectors eligible to apply for a CfD and participate in the scheme. There are no specific proposals in respect of early opportunities or pathfinder co-ordinated offshore projects under the OTNR, i.e. those projects which will share transmission assets but will not be connected to an interconnector.

   Offshore wind phasing

   Currently, CfD phasing policy allows for offshore wind projects within the same Crown Estate lease area to be built in up to three phases (each phase having their own CfD agreement). Certain conditions had to be met including, amongst other things, that overall capacity of a phased project is capped at 1500MW, with at least 25% of total project capacity to be constructed and commissioned in the first phase.

   The Government is considering CfD phasing policy for offshore wind units (as well as the impact of restricting or removing such policy) as it considers there is evidence indicating it has achieved its purpose of mitigating construction risk whilst the offshore wind sector was less mature. This will be of particular interest to offshore wind developers who often seek to phase construction of such projects in line with the phasing arrangements under the CfD, which provides some flexibility on the timetable and mitigates termination risk.

   CfD appeals system

   On whether the current two-tier appeal system under the CfD, which can delay the start of allocation rounds, remains appropriate in the context of the move to an annual allocation round. The Government is also seeking view on potential alternatives to the existing appeal system.

   Repowered renewable generation assets

   BEIS estimates that, by the end of 2024 (inclusive) we are likely to see nearly 400MW of onshore wind projects reach the end of their engineering lifetime (around 40 projects). By 2027 (inclusive), this increases to a total of around 600MW (approximately 70 onshore wind projects) and by 2030 this will increase again to account for around 1.4GW (approximately 100 projects)

   The Government is therefore seeking evidence on whether and, if so, how to expand the scope of the CfD scheme to include “repowered” existing projects – that is, the updating or replacement of a renewable electricity generation asset once it reaches its projected end of engineered life.

3. Policy Updates 

   The Government has provided certain policy updates in the Consultation.

   The balance between market exposure and investor uncertainty

   The Government has confirmed that it believes the current level of exposure to wholesale market prices for AR6 is appropriate but this will be reviewed for future Allocation Rounds, including as part of the first REMA consultation, which considered the role of CfDs in future market arrangements, including high level options for CfD variations, as well as the benefits of increased market exposure, and whether these benefits were likely to outweigh the potential increase in financing cost. The consultation closed on 10th October 2022 and a response is expected this winter.

   Interaction between the CfD and Capacity Mechanism on eligibility

   The Government acknowledged there are problems with existing provisions which intend to enable an entity to withdraw from the Capacity Market in order to be able to participate in a CfD allocation round, and plans to release a separate consultation this winter to set out proposals to address these problems.

   Non-price criteria for CfD

   The Government noted that they will at some point engage stakeholders on the matter of whether to utilise “non-price criteria” to assist in determining a CfD bid, for example for example sustainability, project resilience and system integration. This may result in a further consultation.