Contracts for Difference: First Allocation Announced
The UK Department of Energy and Climate Change (DECC) announced on Thursday 26 February the results of the first auctions for the allocation of Contracts-for-Difference (CfD). CfD is a policy under the UK Government's Electricity Market Reform programme for the competitive allocation of support to renewable energy technology projects. 27 CfD contracts have been awarded, that included 2 offshore wind farms, 15 onshore wind farms and 5 solar PV projects, securing support for more than 2GW of new renewable electricity capacity. The total amount of support amounted to a total of £315 million.
Strong competition in auctions has brought strike prices down, with solar projects securing support levels as low as £50/MWh (near grid parity levels) and onshore wind projects clearing at £80-83/MWh, a historic low for the UK, and lower than earlier administratively set levels of support provided for onshore wind. The two offshore wind projects that secured support, Neart na Goithe (448MW) and East Anglia 1 (714MW) cleared at £114/MWh and £120/MWh respectively, quite low for this technology standard, but still above support levels for technologies like nuclear (EDF's proposed new nuclear plant Hinkley Point C secured 35 year-long funding at £92.5/MWh in 2012 prices). This is a good indication that levelised costs for offshore wind are coming down, as just over a year ago DECC awarded support for offshore wind projects at nearly £150/MWh. CfD contracts awarded for all technologies have a duration of 15 years.
Compared to the previous UK support scheme for low carbon electricity generation technologies, the Renewables Obligation, CfDs represent a lower risk, more secure support instrument for renewable energy projects. Also competitive allocation for renewable electricity means that project sponsors are forced to compete for securing support, hence reducing total burden to the consumer, while serving the government's goals of energy security and decarbonisation of electricity generation.
Of course, the outcome of the auctions meant that some projects were left without any support at all. For those, developers will face difficult decisions: either wait for an uncertain further round of CfD auctions later this year, seek alternative ways to lower the risk of their revenues, sell projects under development or cancel projects at planning stage. The outcome of the oncoming elections is likely to determine the future of CfD auctions during this crucial year, especially for offshore wind, in the UK.
John Dimitropoulos is an Associate Director, Power & Utilities, in KPMG LLP. The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG LLP. The information contained is of a general nature and is not intended to address the circumstances of any particular individual or entity.