The energy trade associations RenewableUK, Energy UK and Scottish Renewables have written to the Secretary of State for Energy Security and Net Zero, Grant Shapps, urging the government to urgently reform the Contracts for Difference (CfD) scheme.
When the £205 million funding for the last round of CfDs auctions was announced on March 16, it was met with criticism from groups including RenewableUK, who warned that it was “sending the wrong investment signals” to renewable energy investors.
“The budget and parameters set for this year’s CfD auction are currently too low and too tight to unlock all the potential investment in wind, solar and tidal stream projects which the industry could deliver,” said RenewableUK’s economics and markets manager Michael Chesser.
In their letter to the Secretary of State, the industry groups put forward recommendations to increase private investment in renewables, and grow industrial supply chains in the UK.
Energy industry urges Government to reform clean power auctions to maximise benefits of low-cost electricity for consumers and deliver more UK supply chain jobs – joint RenewableUK, Energy UK and Scottish Renewables media release: https://t.co/hDOob20LzD @EnergyUKcomms @ScotRenew pic.twitter.com/Va8pY33hCn
— RenewableUK (@RenewableUK) July 4, 2023
The letter states: “Jointly we believe that a broader approach is needed in defining how best value is delivered from Allocation Round 5 (AR5) onwards for the industry and consumer. This should take account of the current economic environment, international competition in the sector and the benefits to UK plc from the timely deployment of homegrown, cost-effective renewable energy”.
The letter goes on to warn that: “The current emphasis on securing renewable capacity at the lowest possible strike price – minimising expenditure rather than maximising benefit – risks creating a less attractive investment environment in the UK. The race to the bottom on strike prices incentivised by the current auction process is at odds with the reality of project costs and investment needs, jeopardising deployment targets.”
“This is especially relevant for supply chain companies that have been recording losses as the continuous squeeze on strike prices has been passed on to them. CfD strike prices are no longer cost reflective and, consequently, the industry’s capacity to invest in critical infrastructure and domestic supply chain is being eroded”.
CfDs allow energy producers to stabilise their revenues by selling energy at a pre-agreed level – the Strike Price – for the duration of the contract.
There has been widespread concern among industry groups like those who co-authored the letter which warned the UK’s support for investment in renewables has not kept pace with incentives offered by the EU and US.
The letter recommends increasing the budget for this summer’s auction round (AR5), because new projects have become eligible to bid since the announcement in March. The potential capacity for fixed offshore wind would need a budget two and a half times higher than its current level, the groups say.
The letter also suggested that fixed offshore wind should be put back into a separate budget pot to maximise deployment, and calls for support for emerging technologies like floating offshore wind and tidal power.
Future CfD rounds should also reflect economic conditions in terms of interest rates and supply chain costs, as the methodology used to date has not provided enough reassurance to developers concerned with changing economic conditions, the letter continued.
RenewableUK concluded that “the definition of the value of CfDs to consumers should be fundamentally reframed to reflect the UK’s net zero targets and to maximise the amount of renewable capacity which could be delivered at a lower cost than new gas projects.”
RenewableUK’s executive director of policy and engagement Ana Musat said: “The parameters set by the Government for this summer’s clean energy auctions are incredibly tight, and could even fail to unlock investment in shovel-ready renewable projects. Time is running out, not only to secure new renewable projects in the coming months, but also to set up a framework for the rest of this decade to ensure that longer term investments in manufacturing come to the UK instead of going overseas”.
Energy UK’s deputy director Marta Krajewska, added: “The Contracts for Difference scheme has been hugely successful in supporting the expansion of clean, cheap, homegrown low carbon power. However if the scheme is to continue playing this vital role and delivering value to consumers, there needs to be a recognition of the costs increases, along with much greater international competition, that have accumulated for renewables projects over recent months.”
With renewables accounting for almost half of the UK’s electricity supply in the first quarter of 2023, the speed of deployment is growing in response to the need to achieve net zero targets, but there remain fears that if deployment doesn’t keep pace with demand, the UK could still be importing billions of pounds of gas into the 2030s.