With the new allocation round for the UK’s contract for difference (CFD) scheme almost upon us, it is timely to think about what is likely to happen and what may be some longer-term implications, as Chris Willow explains*
This allocation round is the second to be held and comes more than two years after the first. The government will be awarding support contracts worth up to £290 million a year (in 2011/12 prices) to projects using so-called ‘less established technologies’ commissioning in 2021/22 or 2022/23. This includes offshore wind, advanced conversion technologies, anaerobic digestion, dedicated biomass with CHP, wave, tidal stream and geothermal projects. The government has limited the amount of ‘fuelled’ projects that can be supported to 150 megawatts (MW). Onshore wind, energy from waste and solar photovoltaic projects will not be eligible.
Developers will submit their applications by mid-April. Then, assuming there are no delays and the budget is oversubscribed (which is what we expect), the government will hold an auction and developers will submit sealed bids at the end of May, and the winners will be notified by late June. If there are delays caused by reviews and appeals, this process could be drawn out until the autumn.
From an offshore wind perspective, the main participants are expected to be Dong Energy (Hornsea 2), EDPR (Moray Firth) and innogy and Statkraft (Triton Knoll). No other big projects are expected to be involved, given the government’s requirement for developers to have all the necessary consents in place before they apply.
The big unknown is the strike price the winning developer(s) will need to bid to win. Having seen a string of impressively low results from the Dutch and Danish auctions last year, expectations are that they will need to be extremely competitive.
The UK’s market structure (especially the inclusion of the cost of electrical connection to shore) means the headline prices will not be as low as some of these other results, but industry discussions suggest strike prices in the £80–85/MWh range, with some going even lower.
Considering that the government had set a ceiling strike price of £100–105/MWh, this kind of result would have a significant impact. For example, using the government’s ceiling price, the £290 million budget could support just over 1 gigawatt (GW) of capacity. If industry lives up to expectations, however, this could double.
So, if this is the current situation, what are the long-term implications of what is happening? What might the consequences be of another strong CFD result for offshore wind? I have suggested some ideas below.
The government’s last statement about its long-term ambition for offshore wind was back in November 2015 when Amber Rudd, then secretary of state for energy and climate change, said that the government could support “up to 10GW” of new offshore wind projects in the 2020s.
As this statement was made before the stunning Dutch and Danish results of 2016, when expectations of offshore wind costs were less ambitious, the question is how government will react to the new paradigm.
It effectively has three choices: it could stick to its deployment target and take the financial savings; it could stick to the same budget and support additional deployment; or it could do something in between.
With the UK’s nuclear programme facing some major barriers, a strong offshore wind showing in this auction could encourage the government to re-evaluate its plans for the 2020s, particularly if it is significantly below the £92.50/MWh strike price that EDF secured for Hinkley Point C.
My guess is that we will see a measured increase in ambitions up to 14GW of deployment in the 2020s, with some more headroom if costs get even cheaper.
Importantly, the UK will not be alone if it does review its targets: other European countries are already reported to be considering their options, most recently The Netherlands, Belgium and Ireland.
Assuming all goes well in this allocation round, we can say confidently that the offshore wind industry has completed the bumpy transition from the Renewables Obligation scheme to CFDs. Looking ahead, however, there are still many important questions that need to be answered about the government’s delivery framework for offshore wind in the 2020s.
For example, the government announced in its Spring Budget this year that it would be replacing the Levy Control Framework, the mechanism used to fund CFDs, but it has not yet given much indication about what will be put in its place.
There is also the question of what other generating technologies offshore wind will be competing against in the future. Looking ahead, it will be difficult to justify its ‘less established’ status beyond 2020, when there may be more than 30GW of capacity deployed globally, and its cost of energy is significantly lower than nuclear.
With the prospect of Brexit looming over everything, getting a clear and robust framework is going to be an industry priority.
A common theme from the recent Dutch and Danish auctions is that competition is a powerful cost-reduction driver. To beat their rivals, developers have needed to sharpen their pencils and come up with new ways to find savings.
In the Dutch and Danish systems, the process involves all the developers looking at the same site and making a judgement about how cost-effectively they can deliver the project. In those systems, prior development of sites is not required, so the entry costs are relatively low.
In contrast, in the UK system, each developer comes with their own site that they will have already spent five or more years and tens of millions of pounds to consent and characterise. This approach creates great pressure on these companies to convert this potential into real projects, but it also creates a high barrier to entry.
Unless developers continue to see the benefit of investing in new sites, there is a risk that there will not be enough competition to drive ongoing cost reduction. The government can compensate for this by continuing to lower the ceiling strike price, but this is a less effective way of price discovery than the Dutch/Danish model.
Finally, it is important that industry continues to make progress on even more cost reduction, and this is going to require further technology innovation.
The UK is playing a critical role in this process, with work on a number of full-scale, offshore demonstration projects due to start this year. EDF’s project off Blyth will involve the first multi-unit deployment of next-generation gravity base foundations with 8.3MW turbines, the European Offshore Wind Deployment Centre in Aberdeen Bay will see the first multi-unit deployment of jacket foundations with suction buckets and 66kV cabling and the Hywind Scotland, Kincardine and Dounreay projects will all see the deployment of floating foundation concepts.
The challenge is that these projects are all being deployed under the soon-to-be-closed Renewables Obligation scheme, and the competitive nature of the CFD auction means that there is now no practical way for stand-alone demonstration projects to secure support contracts.
This problem may be overcome if the developers that secure CFDs commit to deploying innovative technology on some of their units in their supply chain plans. This will require careful policing by the government to ensure developers follow through with such commitments.
This allocation round is going to be important and – we expect – very successful for offshore wind. Once it is done, however, industry and government are not going to have any time to appreciate the scale of their achievement. Having brought offshore wind into the mainstream, the work starts here.
*Chris Willow is an associate director at BVG Associates in the UK.