The energy industry welcomed yesterday’s (3 August) £22 million increase in funding for the Contracts for Difference (CfD) scheme but warned it is still “not enough” to bolster renewables.
The budget for Allocation Round 5 (AR5) was originally announced at £205 million in March 2023 and received backlash from member of the energy industry who warned that the decreasing budget was sending the wrong investment signals for renewables.
Following yesterday’s increase, the budget for AR5 is now £227 million, £58 million lower than AR4’s budget at £285 million.
Overall, the announcement was met with relief throughout the energy sector.
“Following our evaluation of qualifying projects we welcome the Secretary of State’s decision to revise the budget for Allocation Round 5,” said Claire Dykta, head of markets for the National Grid ESO.
Energy UK’s deputy director, Adam Berman similarly welcomed the increase: “We welcome the Government’s decision to increase the budget for the next round of the CfD scheme. 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.“
Praise was quickly followed by warning, however as members of the energy industry alerted that the increase wasn’t enough to incentise renewable investment in the UK.
One of the most prominent issues cited was that the CfD scheme no longer offered financial stable prices for renewable projects.
“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. Supply chain costs for renewables have risen between 20%-40% over the last year – yet this has not been adequately recognised by CfD prices for new projects. The recent decision to stop work on a major offshore wind farm that would have provided clean energy to 1.5 million households shows the danger of resting on our laurels,” continued Berman.
“It’s important to stress that renewables will remain exceptionally good value for money , even at higher prices reflecting the current reality of international market conditions, The energy crisis has highlighted our reliance on volatile and expensive international gas markets. Renewables that provide clean, cheap, homegrown energy provide a route out of that crisis. However without putting the CfD regime on a financially sustainable footing, we risk consumers footing the bill as the UK falls behind other key markets.”
In accord with Berman, Ana Musat, executive director of Renewable UK commented: “At a time when the UK is investing heavily in energy security and looking to create additional economic opportunities by growing the renewables supply chain, it’s essential that we have a consistent pipeline of projects.
“An increased CfD budget can help, but the most important step government could take to encourage investment in this growing sector would be to ensure that we have sustainable pricing in future auctions, which take into account the difficult economic circumstances faced by the sector. Setting artificially low prices will deter investment, reduce our pipeline and limit the UK’s ability to stay ahead in the global race for renewable energy capital, skills and supply chain investment.”
The decreased budget would also fail to unlock the capital investment required to reach the UK’s net zero goal, added Andrew MacNish Porter, policy manager at Scottish Renewables.
“The UK Government calls the CfD mechanism ‘the lifeblood of our renewables industry’, and while today’s announcement of a budget increase is welcome it still falls far short of what’s needed to ensure the heart of this vital part of the UK’s economy keeps pumping,” said MacNish Porter.
“While the sums mentioned may seem large, they are simply not enough to unlock the £50-60 billion capital investment which will be required each year to deliver on the UK’s net zero ambitions through the late 2020s and 2030s and the £1.1 trillion which the Office for Budget Responsibility projects the UK will save by 2050 if it reaches net zero.
“Going forward, the UK Government must ensure it properly funds the CfD mechanism to maximise the deployment of the low-cost, home-grown renewable energy projects we need to end our reliance on expensive imported gas and tackle climate change.”
Amongst these concerns the ever-looming issue of slow grid connections persists in the race to net zero, as highlighted by CEO and co-founder of electricity utility company Piclo, James Johnston.
“Electricity will dominate the future, with demand at least doubling as the country moves away from fossil fuels. But the way in which renewables come onto the grid must improve in order to make the most of these sources – and to ensure security of supply in the face of a more complex system,” said Johnston.
“As part of the government’s commitment to scaling home-grown energy, it is vital that flexibility is seen as equal to generation, as a critical enabler in a successful transition. This will ensure grid stability, solve demand challenges, and ultimately allow us to move to a decarbonised energy system by 2035.”
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