Changes to the Contracts for Difference (CfD) scheme will replace the monetary budget applied to allocation rounds with a ‘capacity ambition’.
The UK government announced reforms to the CfD mechanism that will come into effect in the upcoming allocation round seven (AR7). It consulted on several proposals at the beginning of this year.
To align with the capacity targets set out in its Clean Power 2030 Action Plan (CP30), at least 12GW will need to be secured in AR7, AR8 and potentially (depending on speed of deployment) AR9.
To expedite this, the contract budget notice will be published after the contract allocation process has run, rather than at the beginning of an allocation application window as before.
In place of a budget, the government will publish a capacity ambition for the AR7 contract allocation process and publish a forward schedule for future allocation rounds.
In the coming months the government said it will provide clarity on how capacity ambition will work with other auction parameters.
The change is intended to give energy secretary Ed Miliband more control over the budget, able to set it more efficiently with certainty of the capacity to be secured through the auction.
The secretary of state would have more information related to the budget under the changes, which also enable Miliband to view anonymised bid information via the delivery body (which in AR7 will be the National Energy System Operator (NESO)). This oversight would inform the final budget decision.
CfD process changes for fixed-bottom offshore wind
Because the government will be able to set the budget after viewing the anonymised bid information, it deems that flexible bids will not be needed and thus disallows them.
Adam Bell, director of policy at consultancy Stonehaven, said in a LinkedIn post that he suspects the government will regret this decision.
He wrote: “What I think the Government has done is assume that because they can peek inside the auction, they’ll no longer need [flexible bids] to max out capacity.
“However, having multiple configurations of multiple wind farms that you can essentially pick between is a much more powerful way of ensuring that you can get the right amount of capacity at the right price.”
The government also consulted on proposals that would enable NESO to run part of the allocation process ahead of others—so the secretary of state could, if no Tier 1 appeals (appeals to NESO over an applicant’s failure to qualify for the round) were lodged, request that NESO ran the auction for offshore wind early.
It was decided that the regulatory change needed to enable this would be too extensive to implement ahead of AR7. Instead, the government is considering non-legislative processes to expedite the fixed-bottom offshore wind allocation round.
Clean industry bonus and the price cap
Ofgem’s price cap, which sets a maximum amount energy suppliers can charge for each unit of energy and standing charge on a standard variable tariff, factors in costs associated with the CfD process.
The price cap methodology will be updated to incorporate the cost of the Clean Industry Bonus (CIB), which is folded into the CfD cost, so that CIB payments are explicitly captured in daily and quarterly settlements between the LCCC and the generator. This means CIB costs will be fully factored into the supplier obligation levy so that the price cap is accurate.
The bonus provides financial support for offshore wind developers on the condition that they prioritise their investment in areas that need it most. It will come with an initial £27 million per gigawatt and be allotted through the CfD mechanism.
