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Our Auction Future - what to look for in BEIS' CfD Consultation

In this blog I want to unpick the March 2020 BEIS consultation which is looking to update the rules and eligibility around Contract for Difference auctions. There is lots to recommend it, and clearly a lot of successful industry engagement.

Overall, the consultation will support faster decarbonisation, and also emphasises the extent to which the Government is relying on renewables to help accelerate wider decarbonisation. In short it needs more renewable electricity generation faster, so the auction process is being changed to facilitate this and overcome obstacles. The consultation, which is open for comment until the 22 May 2020 is available here.

First up, I want to celebrate the fact that the consultation changes Government's position on onshore wind and solar, opening up an auction for established technologies in 2021. I blogged separately about the politics of this, and I've used Twitter to deconstruct what this means and explain how this isn't going to lead to subsidy, despite what was claimed in the media (BTW that's not the media's fault, its simply that if money changes hands as it does in an auction, there is no easy explanation for what is happening). The importance of opening up the CfD auction to onshore and solar can't be overstated, even if Government didn't mention this in its press release.

But now let's look in a bit more detail about what Government is proposing for the CfD. As its main market mechanism, it is the policy tool which above all else makes or stops things in low carbon electricity.

FIrst - coal to biomass. Not a surprise, but Government has confirmed that no new coal plant will be eligible for biomass conversion. Coalheads (not many of them left) won't like it, but its pretty inevitable.

Worth noting is the consistency of @beisgovuk thinking. Since CfD inception biomass replacement was a bridge until other renewables could deliver volume. Offshore wind success in particular means there is no need, and Government wants to see coal come off the system quickly.

Second - there is recognition of the role of floating offshore wind, but also tidal stream and wave.

The details on how this will be done are still to be worked out, but @beisgovuk is proposing setting a separate price. This allows floating to compete in a 2021 auction, and helps give an idea of cost and level of interest.

If that works then Govt could set a separate administrative strike price for future auctions. Market players are confident that with a good mechanism (like the CfD), costs can fall quickly as volume grows rapidly.

This support basically last piece in the jigsaw for creating UK floating industry. @CrownEstateScot are running leasing to bring forward sites, UK already has existing schemes, and now there is route to market. Plus, raised ambition from 30 to 40GW by 2030 means floating vital.

Finally, the idea of creating a 3rd pot for offshore wind, and changing the less established pot to cover innovative technologies like floating is interesting. My initial view btw is this works better than trying to accommodate all these technologies in the current Pot 2.

Third - tidal and wave. Its great to see them in the CfD consultation. But the fact that there is no discussion on how they would be covered or supported, or wider merits, shows that there is more to do here to convince @beisgovuk of merits of inclusion.

Wave and tidal remember competed in 1st CfD auction and that ended badly. So we need to see success this time if those technologies have a future route to market. But that means a grown up conversation on price and cost reduction.

Fourth - supply chain. In pointed language, @beisgovuk is saying that the supply chain plans for offshore wind aren't working. Some of the blame lies with them for not enforcing using soft power, but there is a demand for a "more robust" approach and potential for "new measures".

That's not necessarily an easy square to circle. Falling offshore costs are great for consumers, but are really squeezing the supply chain. The UK supply chain that is competitive internationally is winning work. The bits that aren't, well aren't and won't.

The difficult truth for @beisgovuk is that if it wants to see UK supply chain succeed, then it needs a more interventionist approach with better targeted support direct to the supply chain, in a way that other continental competitors do day in day out.

Fifth - Electricity Storage. @beisgovuk isn't actually proposing anything additional to support storage, except flagging it sees additional storage as vital.

What it is doing though is threatening to shift the burden of negative pricing (when there is a lot of wind and low demand) onto the generators, essentially passing on the problem to them (many would say that's right). Higher risk spurs investment into storage yes?

But of course this is a consultation on the CfD. Responsible developers would build more storage and try to take that account in auction bid prices. But less responsible developers won't and will hope to free ride on wider system solutions. That's another market design conundrum

Sixth and finally, changes to rules such as milestone delivery dates, non-delivery, phasing and allocation. On the whole these are changes industry has been asking for, though there are different views depending on who you talk to. Its good to see @beisgovuk doing a proper tidy up.

Overall, there is a lot to welcome in the consultation, but a lot more detail needed, particularly around some new provisions for supporting floating offshore wind, and how some of the provisions around a new set of auctions for established pot technologies will work. So remember, submit your consultation by 22 May 2020 to influence next steps. Given the level of detail industry need, don't be surprised if BEIS runs further more technical consultations later in the year. To help direct the direction of those, consider responding now. If you need help in doing this, and in working through what proposed changes mean for your work, let me know.

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