While the consultation does not confirm the total amount of support that will be made available in any future allocation rounds, in the context of heightened government ambition on carbon emissions and renewables, the consultation proposes a pivot towards support being made available to a wider set of renewable technologies (some established, like onshore wind and solar PV and some, such as floating offshore wind, less established) together with an ongoing commitment to support conventional “fixed-bottom” offshore wind.
The government’s proposal to abandon its opposition to subsidising new onshore wind farms and solar power projects, after withdrawing additional CfD support for both technologies in 2015, has perhaps been most “headline grabbing”. However, the consultation proposes a much wider set of changes, which we summarise below.
As intimated above, it is suggested that both onshore wind and solar will now be eligible to compete, with effect from the next CfD round in 2021. As previously, onshore wind and solar PV will compete with other “established technologies” such as energy from waste with CHP for “pot 1” allocated support.
Conventional offshore wind, it is proposed, will continue to not be treated as an established technology for the purposes of the CfD and will either continue to compete with other “less established technologies” (such as dedicated biomass with CHP) or will compete only with other conventional offshore wind projects as part of a newly created dedicated “pot 3”. In a fillip for floating offshore wind, the consultation proposes to create a separate definition for this technology type in order to allow it to compete separately from conventional offshore wind in the CfD allocation process. This is driven by the ability for floating offshore wind to be sited on deeper waters, thereby:
- avoiding increasing congestion on the shallower waters where conventional offshore wind is typically located; and
- as a corollary of this, increasing divergence in the weather patterns faced by Great Britain offshore wind to help reduce intermittency issues.
Also notably, among other things the consultation discusses:
- Decommissioning - Linking the statutory decommissioning regime for offshore wind and marine energy installations (wave, tidal flow and tidal range) and their related electric cables with the CfD scheme by including specific decommissioning obligations in CfD contracts. Given that the cost of decommissioning offshore wind projects in operation or construction in 2017 was valued between £1.28bn-£3.64bn (2017 prices), the government is concerned about the risk of the Secretary of State having to step in as decommissioner of last resort. The form of this contractual obligation, including the consequences of non-compliance and the way in which compliance will be monitored, is not specified and will therefore need review when made available.
- Bid bonds - The potential for introducing bid bonds (in the form of cash payment, bank guarantee or letter of credit), to be lost in the event of failure to sign a CfD where successful or failure to build out the project. If introduced, this would sit alongside the existing statutory site exclusion “non-delivery disincentive” (NDD). Having, until now, resisted introducing further barriers to CfD participation beyond the existing eligibility criteria (such a grid connection and planning consent, and the associated costs of these) this is an interesting development in the government’s thinking.
- Milestone Delivery Date - The potential for an extension to the 12 month from CfD contract signature “milestone delivery date” (MDD) deadline that has previously applied for CfD contract holders to demonstrate adequate project spend/commitment to the project. The government does not, it should be noted, provide particular commitment to this change, but does invite comment in particular on whether a change to this deadline would assist with effective and efficient project delivery and overall reduction in the cost to the consumer of funding the scheme. As previously, the government will be balancing here the imperative for awarded CfDs to result in new renewables capacity being delivered (as opposed to failing projects holding budget that could be allocated elsewhere) while ensuring the CfD provides an investable and value for money proposition.
- Co-location of storage - Further developing the CfD scheme to facilitate co-location of storage – following previous relatively minor amendments to the CfD contract to allow for such co-location.
- Community benefits / engagement - Updating the existing community benefits and engagement guidance for onshore wind.
- Biomass conversion projects will cease to be able to participate in CfD allocation rounds.
In addition to this, government is also seeking views in relation to a number of house-keeping amendments, the more notable of which include extending the latest CfD scheme delivery (i.e. commissioning point) to 31 March 2030 (at present the relevant legislation specifies a longstop of 31 March 2026, which with the passage of time now requires updating), and reducing to nil the 6 hour grace period of negative electricity prices before the CfD ceases paying-out.
This feels like the first set of detailed CfD proposals that reflect, on the one hand, heightened and more prominent national carbon emission reduction ambit ions as exemplified by the 2050 net zero target, and on the other hand, the dramatic reduction in required subsidy levels suggested by the results of the previous CfD allocation round.
In this context, the proposed widening of CfD access is to some extent unsurprising but nevertheless the volte-face regarding onshore wind and solar PV is striking, and the proposals having been welcomed by many groups following years of lobbying against the previous decision to scrap subsidies for these technologies.
To date, the CfD scheme has been successful in bringing forward low carbon generation at scale, having delivered 16GW of new renewable energy capacity since its inception. For example, the third allocation round awarded contracts to 5.8GW of new renewable energy projects at highly competitive strike prices below the wholesale electricity prices assumed in the auction (see our commentary here).
Assuming the government chooses to allocate funding towards pot 1 for established technologies in the 2021 CfD auction, onshore wind and solar will be able to compete for CfDs once more. Since closure of the CfD to onshore wind and solar, many projects have proceeded to market on a merchant basis, though this has been less successful for the larger projects with higher CAPEX costs. Given that, as at January 2020, the large-scale solar UK pipeline has over 6.5GW of projects with planning applications, the competition for solar CfDs will be fierce. Further, in light of the falling cost of these technologies, generators may secure CfDs at strike prices below the average expected wholesale price for electricity, and so over the course of a contract may pay back as much or more than received in CfD top up payments (based on current market forecasts).
A knock-on impact of re-introduction of pot 1 CfDs is likely to be felt in the market for corporate power purchase agreements (CPPAs), which has been highly competitive. It will remain to be seen how this affects the market for merchant projects and whether this will dent the recent appetite for CPPAs.
There is also the question of whether developers will return to onshore wind and solar project in the same numbers as seen before. Following closure of the CfD to onshore wind and solar in 2015 (and of the Renewables Obligation in 2017 to solar), offshore wind and other technologies have been the focus of most developers. For example, in 2019 only 629MW of onshore wind came online, down at its lowest level in a decade from 2.7GW in 2017 (when developers rushed to qualify for government support). Shovel-ready projects will certainly be the greatest beneficiaries of this news, however for newer projects, land availability, planning constraints and the introduction of new tougher community consent processes still present challenges.
Despite the re-introduction of onshore wind and solar power, offshore wind remains strategically important to government and the consultation recognizes the growing role that floating offshore wind will play in the sector. The current proposals indicate government’s commitment to offshore wind. For example, offshore wind will remain separated in pot 2 despite closer price parity in recent years and government have also proposed splitting out offshore wind technologies into separate pots in the future. Recognizing also that cumulative impacts in the North Sea of fixed-bottom offshore wind may hamper the ability to develop in further and deeper waters, the proposals around floating offshore wind demonstrate the government’s interest in encouraging this particular technology. This is perhaps reflective of government’s commitments under the Offshore Wind Sector Deal, which commits to at least 30GW offshore wind by 2030.
Finally, the consultation is clear that biomass conversions will not be eligible for new CfD contracts, in line with the significant response in favour of this decision which the government received in its call for evidence on biomass conversions which ran from 9 November to 20 December 2016.
Stakeholders and other interested parties are invited to provide their views by 22 May 2020.