The Department of Energy and Climate Change (DECC) has published preliminary responses on stakeholder engagement on the question of the method of allocating Contracts for Difference (CfD).

In an earlier energy update, we announced that DECC was by-passing the first two rounds on CfD allocation (first-come, first-served and unconstrained allocation) and moving straight to competitive bidding – constrained allocation. Under this system, the Government is expecting that, in order to win a contract for difference (the new subsidy regime for renewables), generators will have to bid competitively below the published strike price.

Generators and funders have been concerned to establish the actual method of bidding, including the choice between sealed-bid and descending clock, and between cleared-price and pay-as-bid approaches.

DECC have indicated an intention to focus on only one method, and will now develop a CfD allocation approach based on a sealed-bid model. Some stakeholders were particularly concerned about the use of bid information under a sealed-bid approach and, in particular, that concerns about confidentiality would distort bidding behaviour and reduce the effectiveness of the allocation. DECC have confirmed, in response, that the Delivery Body will be required, by regulation, to treat sealed-bids confidentially (albeit that the independent auditor will require access, subject to appropriate confidentiality clauses).

DECC will now develop the allocation model based on this approach, and will be consulting stakeholders further on such issues as:

  • The auction payment rule (whether bidders pay when bidding, or pay when cleared)
  • How much flexibility is built into the bid parameters, such as different capacities and delivery years
  • How to choose between tiebreakers, if there are two or more projects bidding the same strike price and who are the last affordable projects in the auction
  • Measures to discourage rejection of offers (which DECC views as gaming and speculative bidding) and to discourage projects from bidding if there is no reasonable prospect of reaching the Significant Financial Commitment milestone – mitigating the effect of "bed-blocking" the available CFD budget

There is still a long way to go before DECC have a workable and robust system, and layers of complication keep getting introduced as what was already an inherently complex structure is developed. The market must have some concern that all this is going to be in play to allow the transition period to commence in Autumn this year.