The much anticipated results of the first Contract for Difference (CfD) Auction for renewable energy projects were published by the Department of Energy & Climate Change (DECC) on 26 February 2015 – but was the Auction a success, and what do the results tell us about the state of, and outlook for, the UK's renewable energy market?
The announcement brings to an end the wait for project developers to see which projects will be supported by the new price support regime and which projects will either fall by the wayside, or need to wait until the next allocation round in order to progress.
In a number of respects, the Government's policy appears to have worked. The Auction was clearly a highly competitive process, evidenced by the fact that the full amount of the budget available for new projects was taken up, and that the strike prices secured (particularly by Onshore and Offshore Wind) are some way below the 'cap' on strike prices set by Government.
However, in other respects, the process appears to have led to some apparently anomalous results – and it seems clear that in the early years of the process, the parallel existence of the RO regime for Onshore Wind has reduced competition in the CfD Auction for projects being delivered before 2017.
Onshore Wind success as predicted
The expectation before the Auction was that the vast majority of 'Pot 1' – i.e. the Budget allocated for the more established renewable technologies – would be allocated to Onshore Wind. Those predictions proved largely accurate.
Inevitably, with the number of projects that were likely to bid for this relatively small Budget, pricing was keen and Government will claim – with some justification – success in reducing the cost of Onshore Wind to the consumer. At a strike price of £82.50 / MWh in the 2018/2019 Delivery Year, and with an assumed electricity price of £61.77 / MWh, the level of support that the CfD will provide for Onshore Wind projects is materially less than the level of support currently provided by the RO.
There is a continued downward trend to the cost to the consumer of Onshore Wind, continuing the trajectory from the RO, and enabling more projects to be delivered within what is a very tight framework Budget. This trend can only be positive in terms of the UK's efforts to meet its 2020 carbon reduction target, but it has to be hoped that – whatever the colour(s) of the next Government – the broader policy package (and particularly the climate for securing planning consent for Onshore Wind projects) does not stifle the continued progress which is being made by this part of the industry.
The outlook for Solar
DECC's announcement of the CfD Auction results heralds the reduction of Solar prices 'by as much 58%' - this sounds like great news for the industry and the consumer, but is that reduction real? The strike price of £50 for Solar projects delivered in 2015/2016 is likely to be challenging (and indeed may not be viable) for those Solar developers, and looks likely to be an anomaly resulting from the operation of the Auction process.
For those projects, the strike price is at a level so low that – based on DECC's assumed electricity price – they would most likely end up paying money back to the CfD counter-party, rather than receiving CfD top-up payments. Whether those projects are, in fact, deliverable at that price will be an interesting test of the efficacy of the CfD Auction process (and, indeed, an interesting barometer for the state of the Solar PV market).
If delivery of Solar PV at a strike price of £50 was genuinely viable, we might have expected to see many more successful Solar PV projects in the early years of the CfD – particularly with RO support for >5MW Solar projects coming to an end in March 2015. As it turned out, very few Solar projects were successful in this Auction round, suggesting to us that the reduction in prices heralded by DECC might be more than a little hopeful, and that large Solar projects face a challenging few years competing in the CfD market.
Driving down the cost of Offshore Wind
At the other end of the capacity scale, the prices bid by the two successful Offshore Wind projects (£114.39 for Mainstream's 448MW Neart na Gaoithe project, and £119.89 for Scottish Power's 714MW East Anglia 1 project) are also perhaps lower than the market expected.
If delivered at that price, these projects will be a remarkable indicator of the development of the Offshore Wind market over the last few years. This is particularly so when set against the much higher strike prices (of up to £150) awarded by Government to 3GW of Offshore Wind projects early last year as part of the Investment Contract process, and questions are already being raised as to whether the prices secured under those Investment Contracts were best value for the consumer.
On the face of the CfD Auction results, there seems to have been some success in reducing supply chain costs in the Offshore Wind market in recent years. Assuming that sufficient Budget is made available in the next allocation round, it will be interesting to see whether the downward trajectory for Offshore Wind costs, and therefore strike prices, continues.
A call for Budget certainty
Analysis from RenewableUK suggests that only one in three projects which bid into the Auction were successful.
The allocation risk to which projects are now exposed – a risk which developers did not face under the ROC regime – appears to have incentivised developers to price very aggressively. However, the high allocation risk has meant that a lot of consented projects, ready to be delivered, have (for the time being at least) been frozen out of the market by this process.
As the Budget has been fully utilised in this allocation round, in order for further CfDs to be awarded in future allocation rounds the available Budget will need to be increased. In order for developers to remain incentivised to spend time and money developing projects, they will need to have the confidence that the required increase will happen, in order to give them a fighting chance (albeit in a very competitive process) of being awarded a CfD for their project.
Whilst Government can take credit for securing what looks like very competitive pricing for the support to be provided to the 2GW of low carbon capacity which has been successful in this allocation round, that success needs to be built upon quickly if future rounds (the next of which is expected to take place in October 2015) are to be similarly successful.
To that end, it has to be hoped that the announcement of revised CfD Budgets, committed forward well into the 2020s, will be right at the top of the new Government's agenda once the results of May's election are in.