Today the UK Government published its response to its CfD consultation from earlier in the year. See here for my previous blog on what that set out.
The CfD scheme is the government’s primary method of supporting low-carbon electricity. It encourages investment in renewable energy by providing projects with a stable income, while protecting consumers from paying increased costs when electricity prices are high.
Since auctions began, much has changed. The big picture change is that renewables are now Government is now relying on renewables as the backbone of the GB power system. Despite lots of positive press about new nuclear, its clear that there is further to travel here for the nuclear sector and it will have to wait until the forthcoming White Paper for a clearer bankable commitment.
Offshore wind is obviously the technology of choice, and Government also wants to see growth in floating offshore wind, and now of course we have a commitment for onshore wind and solar (Pot 1) auctions.
Given all this its no wonder that the auction cap has been increased from 6GW to 12GW. That extra space will please everybody as it means we can continue acceleration of new renewable power projects.
Here though is my run down of the auction and what Government decisions mean.
1. Onshore Wind - there is now a space for onshore wind (and solar) through a commitment to run a Pot 1 auction. Onshore wind will need to engage on comunity benefits and is set to publish updated guidance in Summer 2021. In doing this Govt will need to work closely with @scotgov and @WelshGovernment as most projects will be in their territory and competence. They also support CB, but expect wrangling behind the scenes. How much onshore wind and solar actually participates will depend on the auction prices in the draft budget. Expect utilities to want to access the CfD to de-risk investments (but with lower returns) while independents start to push out on a merchant basis.
2. Pot Structure. As expected, three pots. Pot 1 for established technologies like onshore and solar, a 2nd pot for emerging technologies like floating offshore and tidal stream, and a new 3rd pot for fixed offshore wind. A dedicated 3rd pot means Government can give suFficient budget that supports ongoing scaling of these projects, while preserving space in 2nd pot to support technologies at different scales.
3. Floating offshore wind. As expected Government is backing floating, with a restatement of the 1GW by 2030. Government has listened and reduced water depth to 45m. That will hearten anyone looking at WaveHub and Pembrokershire Demonstration Zone and potentially some Scotwind sites. Government is not proposing allowing phasing for FOW. Clearly it wants industry to learn to run a short distance before attempting a marathon. That makes sense but if you disagree you can respond to the consultation (below).
4. Hybrid offshore. Government has taken on board some industry views on future likelihood of hybrid (fixed and floating) sites. It hasn't decided what to do but will watch this issue as floating matures to become a lower cost technology.
5. Delivery Years. As expected Government is going to extend the delivery years from 2030 to 2035. This will help keep momentum in late 2020s and early 3030s and is necessary if we are to deliver 40GW of offshore, and the 1GW floating target. If not delivery would stall.
6. Supply Chain Plans. Government is firm here that it wants to see more action on UK supply chain, and so is consulting on stricter supply chain rules. Expect alignment with the sort of processes being seen in Scotwind (more data and regular reporting). The consultation on this is here. Also included are questions on phasing for floating, potential changes to the BSC and changes due to Brexit.
7. Coal to biomass. Not a surprise, good to see that this is being excluded from future CfD rounds. The long stated aim has been to include as a transition fuel while other renewables matured. That has happened. And of course, there is not much coal left to convert to biomass.
8. Decommissioning. Government has taken on board consultation responses and is not proceeding with linking CfDs to decommissioning "at this time".
9. Storage. There are no changes proposed relating to storage. Government asked generic questions about storage, and clearly no clarity has come out of the consultation re. co-location, or how to best incentivise. Government will keep a watching brief. That btw seems about right to me. The best way to stimulate storage is via intelligent network pricing, via Ofgem incentivising DNOs to work as DSOs etc. A Storage CfD would allow double dipping by generators which would distort the market.
10. Negative pricing (if you are still with me I assume you care about this stuff too yes?). Government is going ahead with proposals to change the CfD so generators bear some negative pricing risk. That on the whole makes sense. It also btw could help stimulate storage investment.
11. Milestone Delivery Date. Currently set at 12m, its to be extended to 18m. That also makes sense. The MDD needs to be longer because offshore projects are getting bigger, and we'll have a first gen of floating projects. A longer MDD allows developers more time to get projects in full order and main contracts in place so it can reach final investment decision. Bigger projects take longer, plus it needs OEM agreement and they will also be busy talking to a lot of projects.
12. Flexibility. Government is going to amend CfD regulations so it has more flexibility to use caps, maxima and minima to (my words) 'play tunes' with the CfD and seek to steer it in different directions. Obviously big caveat here that it depends on the tune as to who decides to dance, but in principle this is important. Rounds 1, 2 & 3 show that in multi-technology pot you get lots of the cheapest technology and not much of anything else. In the Round 1 Pot 1 auction there was lots of onshore, not much solar. In Pot2 auctions there has been lots of offshore wind, not much space for anything else (including remote island wind). In a new Pot2, Government will need to work hard to bring forward different tech.
13. Tidal Stream. If you're still here you deserve a thought on tidal stream. The good news - its in. The bad news, Government doesn't talk about the technology much. That's despite a separate marine energy consultation. Government does say that it will feed this marine consultation response into the White Paper, but compared to floating, Government is clearly fence sitting. It can't not allow tidal into the CfD, but its still to be seen if it will create conditions to make CfD work for tidal. With the Environmental Audit Committee holding an inquiry into tidal power (which I'm advising on), that provides a route for this sector to press its case for why it deserves support.
23. What next? Well now BEIS is running its consultation on supply chains, phasing etc (all docs are bundled here. And in early 2021 expect a draft budget with full proposals for Auction Round 4.
So, lots to play for and lots for an industry to do. We of course need to scale up rapidly and there is lots of opportunity for offshore wind, onshore wind and solar, and now space in the CfD auction for everyone. If Government continues these levels of support in future auctions we will see at least 40GW of new capacity added across the decade.