On 9 November 2016, when the world was preoccupied with the result of the American presidential election, the Department for Business, Energy and Industrial Strategy (BEIS) finally published the draft Budget Notice for the second Contracts for Difference (CfD) Allocation Round.

Timings

The second round will open on 3 April 2017.  Projects over 300MW have to submit a Supply Chain Plan between 9.00am on 9 January 2017 and 5.00pm on 13 January 2017.

Budget

As promised in the March 2016 Budget, the budget for this second CfD round is £290 million of subsidy (per year) for Pot 2 technologies commissioning in 2021/22 and £290 million (per year) for Pot 2 technologies commissioning in 2022/23.  It will be increased by inflation to £295 million for both years (in 2012 values, which is what National Grid will value the bids against).

Eligible technologies and Administrative Strike Prices

The budget is for Pot 2 "less established" technologies only.  This means that, now that the Renewables Obligation has ended, there is no subsidy for new onshore wind, nor for solar PV. 

The eligible technologies, and the maximum strike prices they may bid (in £/MWh, 2012 prices) are:

Technology

2021/22

2022/23

Offshore wind

105

100

Advanced Conversion Technologies (with or without CHP)

125

115

Anaerobic Digestion (with or without CHP) (>5MW)

140

135

Dedicated Biomass with CHP

115

115

Wave

310

300

Tidal Stream

300

295

Geothermal

TBC

TBC

 

The strike prices have been set to enable the cheapest 19% of projects within each technology to compete; and the level of budget available means that there will be more potential projects than budget and therefore an auction process will apply whereby projects will compete through bidding strike price levels (as applied for the first allocation round).  BEIS are keen to point out that the offshore wind strike price caps are 25% lower than those in the first round (and lower than the final strike prices set by the first auction of £115-£120). That reduction is no doubt influenced by recent strike prices seen in the Netherlands.

The Government has the ability to set minima (i.e. ringfence an amount of the budget for certain technologies which bid at or below the strike price caps) and maxima (i.e. specify the maximum amount of the budget available for certain technologies).  In the last round, wave and tidal projects benefited from a 100MW minima but BEIS have decided not to extend this as the expected costs for wave and tidal stream remain high and reserving a proportion of the budget for them, at the expense of other potentially less expensive technologies, does not represent good value for money for consumers.

Fuelled technologies

Advanced conversion technologies, anaerobic digestion and dedicated biomass with CHP (known as 'fuelled technologies') have a cumulative maxima of 150MW or £70 million in 2012 prices.  The Government is reviewing fuelled technologies in the CfD and intends to limit the potential for committing to lengthy 15 year support for fuelled technology projects which will not deploy until 2021/22 or 2022/23, so has imposed a temporary maxima.

There is a separate Call for Evidence on fuelled technologies which asks, among other things, how the CfD scheme should treat biomass conversion in the future; what policy changes would be most effective in supporting cost reduction; and what factors the Government should take into account in considering the interaction between the CfD scheme and support for decarbonisation of heat.

This also asks for more evidence on the costs of geothermal and the interdependency with Renewable Heat Incentive (RHI) tariffs.  This will inform the setting of a geothermal strike price for this CfD round, which will be published after the Call for Evidence has concluded (it closes on 20 December).

Scottish islands onshore wind

There has long been calls for onshore wind projects on remote Scottish islands to be treated differently from other onshore wind projects and according to Angus MacNeil MP, the UK Government had received informal approval from the EU for this.  Although there is no provision for Scottish islands onshore wind projects in this round of the CfD, BEIS have issued a short consultation on whether they should be treated differently and if there could be other measures outside the CfD that would remedy any specific challenges for these projects.

Supply Chain Plans

Finally, projects over 300MW are required by the Contracts for Difference (Allocation) Regulations 2014 and the Electricity Market Reform (General) Regulations 2014 to submit a Supply Chain Plan to National Grid for approval before they can qualify to take part in the CfD auction.  This guidance explains the process and how the plans are assessed.  Note that there is only a week's window (9.00am on 9 January 2017 to 5.00pm on 13 January 2017) to submit plans.  Given the 150MW maxima on fuelled technologies, in reality only the larger offshore wind or wave/tidal projects will have to comply with this.

Industry reaction

As to be expected, when set against today's other headline news, the reaction to this long-awaited announcement has been mostly positive. The offshore wind industry welcomes the certainty of a date for the auction and the likely strike prices.  BEIS says those are unlikely to change before the final budget, which must be published no later than 10 working days before the auction. 

Scottish stakeholders however expressed disappointment that the 800MW of consented Scottish island onshore wind projects are still without subsidy; and the lack of minima for wave and tidal will make it harder for these technologies to compete with other, cheaper, ones for a CfD.