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Onshore Wind and Solar PV return for next CfD auction

  • United Kingdom
  • Energy and infrastructure - Clean energy

04-03-2020

UK GOVERNMENT RECOGNISES ROUTE TO MARKET CHALLENGES AND SHOWS SIGNIFICANT SHIFT IN APPROACH FOR UK RENEWABLES

On 2 March 2020, the UK Department for Business, Energy and Industrial Strategy (BEIS) published a consultation on the Contracts for Difference (CfD) scheme. Within the consultation, BEIS has announced its intention to include auctions for “established” technologies such as onshore wind and solar PV in the next CfD allocation round in 2021 (AR4).

Eversheds Sutherland Comment

The previous CfD allocation round (AR3) was a watershed moment for the CfD scheme, as the record low strike prices indicated that a greater level of capacity can be deployed within the CfD budget than was previously anticipated. Building on this success, the recent announcement indicates a willingness towards transparency on prices for all technologies and demonstrates a clear policy direction towards incentivising increased deployment, which is needed to support decarbonisation of the UK power sector and meet the net zero 2050 commitment.

As indicated by BEIS in the consultation, reliance on merchant deployment of these technologies alone may not result in the rate and scale of new projects needed in the near-term. The decision by the UK Government to back “established” technologies such as onshore wind and solar will therefore be welcomed by a number of stakeholders in the UK renewables sector.

Caps and budgets

Stakeholders will hope that the positive development in relation to “established” technologies is backed up by ambitious AR4 capacity caps/budgets which allow for increased deployment within both technology pots, i.e. to ensure that “less established” projects do not lose out as a result of this development.

Planning

The proposals regarding increased community engagement will be of particular interest to stakeholders with an interest in unconsented projects, as the alignment of the policy intent with the planning process is a key factor in determining whether such pipeline projects can be deployed. We would also encourage stakeholders in generation projects to take note of the technical proposals, especially those relating to negative pricing, de-commissioning and non-delivery disincentives, as these measures may have an impact upon project revenues and/or the feasibility of certain projects.

Michelle T Davies comments:

It is important that the Government has recognised the route to market challenges which exist for much of the renewables sector in the UK.  As a team we have focused heavily on this including helping to profile this challenge within Government. However a significant amount of renewables needs to be deployed if the UK is to meet its carbon budget and the size and operation of the caps will be key in all this. This is where our concern lies but we are excited about the prospect of an onshore wind and solar surge in the UK where it makes entire sense.  Balancing solutions will have to be a corresponding area of focus.  But for now the UK is back on the renewables map and we look forward to working with our clients in the UK market on new developments, construction, financing and innovative offtake solutions. We really do have the lead team which is ready to go.”

Simon Davies comments:

“The price certainty that can be gained from a CfD is so important for deployment of UK renewables at the rate and scale that we need.  But this must not be confused with subsidy.  It is not a subsidy – it creates a route to market.”

Key proposals of the consultation

Set out below is a non-exhaustive list of proposals in the consultation (in no particular order):

1.    Auction for Established Technologies: BEIS has stated that the fourth CfD allocation round (AR4), scheduled for 2021, will include auctions for both established (‘Pot 1’) and less-established (‘Pot 2’) technologies. Pot 1 includes onshore wind (>5MW) and solar photovoltaic (PV) (>5MW).

2.    Community Support: BEIS is consulting on best practice when engaging with and supporting local communities on renewable energy developments. In particular, it proposes to update the existing community benefits and engagement guidance for onshore wind, in order to ensure local communities are appropriately involved in decision-making on such projects. BEIS has also invited comments on a proposal to create a register of renewable energy developments in England, which would list available projects and community benefits. This is recognising that onshore wind farms in England have been a challenge in recent year due to opposition from local communities.

3.    Pot Structure: BEIS is consulting on whether to keep Pot 2 as it is currently structured, or whether to separate offshore wind into a third pot. Remote Island Wind farms remain in the Pot 2. Despite the decreasing costs of offshore wind (as evidenced by AR3), the Government is not minded to put offshore wind into Pot 1 to compete with the established technologies, as offshore wind is considered to be strategically important to meeting net zero emissions and one of the most scalable technologies.  The intention of this proposal is to allow more appropriate parameters (e.g. monetary budget, capacity cap, delivery years) to be set for each of the pots to reflect project characteristics and reduce the risk of potential future suboptimal auction outcomes (such as higher strike prices, and hence consumer costs, than necessary). This does leave the least developed technologies, such as wave, tidal and geothermal, still competing with other Pot 2 technologies.

4.     Floating Offshore Wind: The government is considering separately defining floating offshore wind projects from conventional, fixed-bottom projects and providing the technology with its own administrative (i.e. maximum) strike price which would be distinct from fixed-bottom offshore wind. BEIS considers that this may help accelerate the path from pilot projects to commercial deployment at scale.

5.     Extension of Delivery Years: BEIS proposes to amend existing legislation in order to extend ‘delivery years’ to cover the period up to 31st March 2030 (as current legislation does not allow for allocation rounds for delivery years after 31st March 2026).

6.     Supply Chain Plan Policy: Currently, generating stations of 300MW or more are required to provide National Grid with a statement from the Secretary of State approving their Supply Chain Plan. The government is considering introducing new measures to strengthen the policy through a more accountable and robust compliance regime. It is also asking whether the 300MW threshold for submitting a Supply Chain Plan should be lowered.

7.     No new CfDs for Coal-to-Biomass Conversions: The Government is proposing to exclude new coal-to-biomass conversions from future CfD auctions. Existing CfDs supporting coal-to-biomass conversion projects will remain unaffected, as will biomass conversion projects which are not otherwise subsidised and seek to participate in the Capacity Market.

8.     Decommissioning: The Government is considering options to ensure decommissioning obligations are taken seriously given the likely increases in offshore renewable capacity. In particular, it is considering how the Offshore Renewable Energy Installations (OREI) decommissioning regime could be linked with the CfD scheme for future CfD rounds.

9.     Non-Delivery Disincentive: Under current rules, projects that cannot achieve their Milestone Requirement are excluded from participating in further auctions, subject to an exclusion period that can be up to 24 months after CfD notification.  BEIS is concerned that there is an increasing risk that projects do not deliver on time as CfD prices come down. Consequently, BEIS is proposing to extend the exclusion period to 36 months and is consulting on alternative disincentives to non-delivery, including the requirement for applicants to procure bid bonds.

10.   Negative Pricing: Under current rules, generators receive difference payments (at the level of their strike price) during periods of negative pricing, provided that there are less than six consecutive hours of negative pricing. No CfD payments are received when day-ahead prices are negative for six or more consecutive hours. The new proposal is to extend the existing negative pricing rule so that difference payments are not paid to CfD generators when the market price is negative. This proposal will be of concern to investors, given that the BEIS updated analysis shows an increase in the expected frequency of day-ahead negative pricing events and therefore this may reduce revenues for generators. If this proposal was adopted, it would put additional onus on CfD generators to be able to respond more quickly to negative market price signals and it would also need to be taken into account by CfD generators under the terms of their PPAs (e.g. right to curtail during such periods).  

11.   Flexible Capacity Caps and/or maxima and minima thresholds: BEIS proposes that any capacity caps and/or maxima/minima thresholds may apply as ‘soft’ constraints in future CfD allocation rounds (rather than hard limits/thresholds). Taking AR3 as an example, there was a 230MW gap between the clearing capacity (5.77GW) and the capacity cap (6.0GW). This gap was likely due to an offshore wind or large remote island wind project exceeding the cap. A ‘soft’ cap may seek to avoid this scenario, e.g. by accepting the bid and awarding a contract to the project that breaches the capacity cap, if enough monetary budget remains.

12.   Storage: BEIS recognises that storage could be a means to mitigate some of the potential negative impacts of intermittent renewable generation on the UK power system. It is therefore consulting on changes to the CfD scheme to facilitate the co-location of storage with CfD projects.

13.   Administrative Strike Prices: BEIS is inviting views on how it might change its approach to setting administrative strike prices (i.e. maximum/reserve strike prices) to ensure value for money in future.

What happens next?

The consultation closes on 22 May 2020, to find details on how to respond, click here. Once the consultation has closed, BEIS will analyse responses and set out how it intends to proceed in a government response.

If you wish to discuss the potential impact of these proposals on your business or any possible opportunities arising from the announcement of this consultation, please contact our specialist team below.