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Offshore wind target still ‘unachievable’ despite record CfD budget

The UK government is dishing out a record amount of price support for renewables in a bid to atone for last year’s botched Contracts for Difference (CfDs) auction. Offshore wind will be the big winner in the sixth CfD allocation round (AR6), but industry groups warned the UK’s 2030 target is still “unachievable”.

Britain’s flagship renewables scheme received its biggest ever funding boost, with more than £1 billion for the upcoming auction – four times more than the previous round – of which £800 million was reserved for offshore wind. The technology has also been returned to a separate CfD funding pot, something that many industry participants had requested following the AR5 flop.

AR5 drew zero offshore wind bids due to government setting an impossibly low ceiling price that failed to accommodate a spike in labour and materials costs in the wake of the pandemic and Russia’s full invasion of Ukraine. The requirement for offshore wind to compete with other technologies such as solar and onshore wind was an aggravating factor.

More, please

The budget uplift was widely welcomed by industry groups, but many were quick to point out that the parameters of the auction – and particularly the lower reference price used to calculate CfD top-up payments – would stymie the amount of capacity likely to be contracted.

RenewableUK said the AR6 funding “will only secure between 3 to 5 gigawatts” out of an estimated 10 GW of eligible projects. CEO Dan McGrail urged ministers to be “more ambitious” by revising the budget upwards for both this auction and future rounds to keep on track to deliver the government’s target of 50 GW of offshore wind by 2030.

“At the current pace, this target looks unachievable,” McGrail said.

The UK currently has 14.7 GW of operational offshore wind, which generates 14% of Britain’s electricity per year. There’s another 14 GW under construction, post-final investment decision (FID), or holding a CfD pre-FID.

Hitting 50 GW this decade means more than tripling operational capacity in a little over five years, implying an installation rate of 7 GW every year between now and 2030 and contracting. Until now, the sector has not delivered more than 3 GW in any given year.

Falling short

Analyst estimates of how much capacity could be supported by £800 million sit within a narrow range of roughly 3 GW at the low end and 6 GW in a best-case scenario. In all cases, it falls well short of the ~10 GW needed to achieve the 2030 target.

LCP Delta said it could be somewhere between 4 GW and 6 GW, while Aurora Energy Research said it could be between 3 GW and 6 GW. Outturn depends on how competitively projects bid at auction; lower strike prices mean more capacity, and vice versa. If strike prices are between £55/MWh and £70/MWh (2012 prices), contracted capacity could be between 3 GW and 5 GW, EnergyUK said.

Regen said the administrative strike price of £73/MWh (2012 prices) would contract roughly 3 GW. If the auction clears at £65/MWh, this could increase to around 4 GW. To get on track for 50 GW by 2030, the government needs to contract “more like 10 GW in each round”.

Chart by LCP Delta

The government has decided to allow projects contracted in the fourth allocation round to relinquish up to 25% of their CfD capacity and re-bid this into AR6. This is intended to help projects with strike prices that have proven too low to be viable. Up to 2.8 GW from AR4 could re-bid into AR6, “meaning that a significant portion of the budget is likely to be used to ensure that already committed capacity can deliver, rather than securing new capacity, making it even harder to hit the 50 GW energy security target,” said EnergyUK.

Regen senior energy analyst Grace Millman said there is a lack of support for floating offshore wind in AR6. “It doesn’t currently look like the budget allocated would support more than one project,” she said in a social media post.

Overly-cautious

A limiting factor on the AR6 capacity volume is an adjustment in the reference price used to calculate the CfD top-up payments. In its budget announcement, government revised this down from £28/MWh to £24/MWh (2012 prices) for the 2030/31 delivery year.

“In today’s money, this looks more like £35/MWh, still very low compared to the current wholesale price, which hasn’t been consistently that low since 2015. If government made a more realistic assumption, this could buy us more bang for our buck,” Millman said.

The CfD reference price is a forecast of future wholesale prices that each technology is expected to capture when it sells its power in the electricity market. The reduction in this ‘estimated’ reference price means government must allocate more CfD budget to contract the same amount of capacity than if it had used a higher estimate.

The problem here is that the estimate is often quite wrong. Government uses a dynamic dispatch model to calculate the reference price for each technology. This ‘black box’ model computes a staggering array of factors such as future heat and power demand, capacity, load factors, time of dispatch, seasonal temperatures, fuel and carbon prices.

When projects are operational, a ‘real’ reference price is used to calculate CfD payments based on market prices. The Low Carbon Contracts Company (LCCC) calculates the Intermittent Market Reference Price (IMRP) using day-ahead data received from exchanges EPEX and N2EX.

The discrepancy between the estimated and real reference prices is substantial. The Office for Budget Responsibility (OBR) has consistently overestimated the cost of running the CfD scheme since its inception, primarily due to real-world power prices coming in above estimates (which reduces the actual CfD payments that are levied onto consumer bills).

Chart by Regen

The cautious approach to calculating the reference price is in all likelihood intended to protect consumers from excessive levies. However, an over-abundance of caution places artificial constraints on the amount of capacity that the government can contract at each CfD auction, thereby slowing deployment and industrial momentum.

There was a palpable sense of disappointment emanating from wind industry reactions to the AR6 announcement. While trade bodies were at pains to express their support for the budget uplift, there has been almost universal criticism that this is still too little to steady the ship after AR5. With that in mind, and the fact that more capacity will leave AR6 empty-handed than holding a CfD, there is likely to be sustained interest in alternative routes to market.

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