The Labour government has been at pains to highlight its immense task. It has lambasted the previous government for leaving a mess and stressed the need for patience.

The message is a clear attempt to manage expectations ahead of a painful autumn budget. But it is also based in truth – and the results of the latest renewables auction scheme are a case in point.

In energy policy, reigniting momentum in offshore renewables was never going to be a quick fix. In the end, the sixth Contracts for Difference (CfD) allocation round (AR6) fell short. It was unable to both atone for the failings of previous rounds and get the power sector on course for Labour’s “clean power by 2030” target.

AR6 only awarded CfDs to two new offshore wind farms, with an aggregate capacity of 3.3 GW. This is a far cry from the 5-6 GW that analysts had anticipated.

Vintage capacity

The main reason for this was the special allowance made to let projects that won CfDs in the problematic AR4 tender, from 2022, re-bid up to 25% of their capacity into AR6 to secure a higher strike price.

Almost 1.6 GW of “old” capacity won CfDs in AR6 via this so-called ”permitted reduction” mechanism. This gobbled up a large chunk of the auction’s limited budget.

The Department for Energy Security and Net Zero (DESNZ) claimed the result “revitalised” Britain’s offshore wind sector, “righting the wrongs of [the] previous auction round”. AR6 was certainly an improvement on AR5. But the bar was as low as it could be, given last year’s tender attracted zero offshore wind bids.

It is a stretch to claim that a meagre 3.3 GW of capacity will “revitalise” the sector. It has been bludgeoned by inflationary cost pressures, supply chain bottlenecks, global competition for manufacturing capacity, successive interest rate hikes – and botched auction rounds. Labour’s last-minute decision to hike the budget for AR6 had raised expectations for more.

Piling in

It wasn’t all bad news. AR6 secured 9.6 GW of renewable capacity, almost triple the amount contracted in AR5. It was also another fiercely competitive auction that cleared well below the administrative strike prices (ASP).

Mature technologies in Pot 1 – onshore wind and solar PV – both cleared at £50 per MWh (in 2012 prices). This is a reduction of roughly 20% against the ASP.

Less established technologies in Pot 2 – floating offshore wind (FLOW) and tidal stream – cleared at £140 per MWh (-20% ASP) and £172 per MWh (-34% ASP) respectively. Only one FLOW project, Green Volt from the Scottish INTOG leasing round, secured a CfD.

Offshore wind in Pot 3 cleared at £58.87 per MWh, almost 20% below the ASP. Observers welcomed this as proof that the industry has largely overcome the inflationary supply chain pressures of recent years. Some were cautious given the industry’s failure to deliver projects that bid at impossibly low strike prices in AR4.

“This is a very positive outcome and credit should go to government officials and industry who have worked together to find a price that delivers value for money to the consumer as well as a fair return on investment for developers,” said Regen senior analyst Grace Millman.

“The government should use this experience to understand that a ‘race to the bottom’ is not the way to create a sustainable industry.”

Bottleneck

Low strike prices are not a universally good thing. The cost pressures that highly competitive auctions heap upon supply chains are by now well understood.

A further issue is that of constraining access to market. Strike prices drop when demand for CfDs outstrips supply and projects bid more aggressively to improve their chances of success. By necessity, many projects fail to win a CfD. In the absence of alternative routes to market, this acts as a bottleneck to development.

Regen estimates there were 8-12 GW of offshore wind projects eligible to bid in AR6. Most of these failed to secure a CfD. It will depend on how many sites secure planning consent in time. But as much as 28 GW of capacity may be eligible to compete in AR7, in 2025, the trade body said.

Last call for 2030

The seventh allocation round “is increasingly looking like the ‘big one’ to meet the government’s clean power target,” Regen’s Millman said.

Pranav Menon, research associate at Aurora Energy Research, agreed. “Although a highly competitive auction, with significant gains in capacity procurement, more progress is essential to meet the government’s target of 60 GW of offshore wind by 2030. AR7 will be the final opportunity to secure the remaining capacity needed to meet these targets,” he said.

The UK needed to contract 35 GW of offshore wind across AR6, AR7, AR8 and AR9 to achieve 2030 goals. With just 3.3 GW procured in AR6, it must award more than 10 GW of CfDs per round.

It is hard to see DESNZ securing enough budget to do so. The CfD scheme is funded via a levy on consumer bills. The Treasury has oversight of this via the Levy Control Framework. To procure more than 10 GW, strike prices and auction budgets would need to rise to unprecedented levels.

Regen CEO Merlin Hyman suggested DESNZ consider introducing a ‘Buy it Now’ CfD. This could back any project that can deliver by 2030 at a discount to the AR6 clearing prices. He also called for a move to six-monthly auctions to accelerate delivery.

Solar in the shires

Offshore wind is highly likely to fall short of 60 GW by 2030. So, can solar rise to the occasion?

AR6 procured a phenomenal amount of solar PV capacity. The auction awarded CfDs to a record 115 onshore renewables projects, split between 3.2 GW of large-scale solar and 990 MW of terrestrial wind.

The geographical distribution is noteworthy. The lion’s share of solar – 3 GW – is located in England, where securing planning permission is far from straightforward.

DESNZ secretary Ed Miliband is already squaring up for a clash with the anti-renewables lobby. This is remobilising across parts of rural England in anticipation of a slew of planning applications for very large ground-mounted photovoltaic arrays and onshore turbines.

A well-funded opposition group can significantly delay or derail a large onshore renewable energy project, or force the development to downsize to reduce environmental and visual impacts. But rather than seeking consent from central government, it appears that many solar developers are instead splitting their projects into smaller chunks to go through the local planning route.

Among the AR6 winners, 18 solar projects were sized at 49.90 MW or 49.99 MW – just under the 50 MW threshold that would put them in the Nationally Significant Infrastructure Projects (NSIP) regime.

“With projects seemingly deliberately capping their own size to avoid the DCO [Development Consent Order] process, it shows there is currently little confidence in the NSIP regime in projects getting built quickly,” said Sam Richards, founder of pro-growth campaign group Britain Remade.

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