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COMMENT: CfD auction results in host of opportunities – and questions

Fri 15 Sep 2017 by David Foxwell

COMMENT: CfD auction results in host of opportunities – and questions
The low cost of offshore wind presents a challenge to other technologies and presents the government with many questions

As Keith Patterson*, a partner at Brodies LLP explains, the results of the UK’s second CfD auction have caused quite a stir and the headlines don’t do full justice to the underlying story.

Offshore wind for 2022/23 secured two CfD contracts for difference in the recent auction in the UK, at a strike price of £57.50 (in 2012 prices).

Given that the lowest strike price for offshore wind in the first CfD auction was £114.39 (US$152.12), this represents almost exactly a halving of the price in just two years – a near vertical descent in the price of offshore wind.

While this price decline looks astonishing, it is only half the story – the decline in subsidy costs is even greater. The market price fluctuates currently within a range of about £40-45 per megawatt hour (MWh). A strike price of £57.50 represents an average subsidy of around £15 per MWh, while £114.39 represents a subsidy of around £70-75 per MWh. Therefore, while prices have been cut in half, the subsidy cost is less than a quarter of the subsidy cost only two years.

The policy implications have yet to sink in, and Professor Dieter Helm’s report into the cost of energy, which the Department for Business, Energy & Industrial Strategy (BEIS) recently commissioned – which is due next month – will make interesting reading.

One immediate result of the fall in prices is that the allocated budget of £290M appears not to have been fully spent. There is no confirmation of leftover budget in the text of the results released by BEIS, but the figures appear to indicate that the maximum forecast subsidy on the CfD contracts allocated in Round 2 is £176M.

This leaves around £114M of budget unutilised. We are confident that developers are already knocking on Whitehall’s door, suggesting how that budget could be put to use.

Clearly, the cost of offshore wind power presents a challenge for other technologies in Pot 2 (and gas). They have no prospect of competing with offshore wind. The results present government with many questions.

Should offshore wind become a Pot 1 technology and compete against onshore wind and solar? This could potentially enable consumers to earn a return – that is, a reduction on the cost of electricity – for offering price stability to developers by awarding CfDs at below the market price.

Should the focus be on offshore wind to the exclusion of all else? Where does it leave nuclear? Where does it leave gas? Does it represent an opportunity to use budget to support potentially complementary technologies, such as island wind (wind in Shetland for instance is relatively uncorrelated to wind off East Anglia) or tidal technologies.

And, finally, if the price of offshore wind is £57.50, could onshore wind be used, not just to cut subsidy, but to cut the cost of electricity to consumers?

The results are interesting also because of the significant difference in strike prices between 2021/22 and 2022/23. In fuelled technologies, the strike price for 2022/23 was £40 per MWh against a prior year strike price of £74.75. In offshore wind, the comparison is £57 against £74.75. We expect renewables deployment costs to fall year-on-year but not by that much.

Looking at the results though, it could be the 2021/22 results that are anomalous. Two very small projects (50kW and 640kW) have been awarded CfD contracts. We will never know which bid set the clearing price but we might hazard a guess that it is one of these two projects, just managing to squeeze under the 150 megawatt cap on fuelled technologies.

One other point to remember is that offshore wind can commission in phases, with all phases attracting the strike price for the first phase. A footnote to the results indicates that each of the offshore projects will commission in three phases, which makes sense of course in a world of falling prices. Of the two projects awarded a contract for 2022/23, the actual delivery years will be 2023, 2024 and 2025.

£57 is a large price reduction to achieve, but, as we have seen, eight years is a long time in renewables. The winning bidders are therefore banking on significant reductions in the levelised cost of energy over the next 6-8 years.


*Keith Patterson is head of the projects group at Brodies. He has advised developers, investors, lenders, public sector bodies and community groups on projects, and has completed more than 20 renewables financings

 

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