The first round of the Contracts for Difference (CfD) programme — the UK scheme that is designed to support low-carbon generation and a capacity margin in the energy sector — has concluded. Contracts were offered to 27 renewable electricity projects with a total value of some £315 million (US$500 million), which include two offshore wind farms with a total planned capacity of more than 1.1 GW, 15 onshore wind projects and five solar projects. In total, more 2 GW of new low-carbon capacity (including renewables, nuclear and carbon capture and storage) could be built under the CfD scheme.
According to the government, this CfD scheme will cost £110 million ($170 million) per year less than would have without the program. And as a result of the scheme, consumers are getting around 550 MW more capacity than could have been funded without competition.
“The auction has driven down prices and secured the best possible deal for this new clean, green energy,” said Ed Davey, secretary of the department of energy and climate change (DECC). All technologies bidding into the CfD scheme (apart from energy from waste) cleared significantly below the strike prices — the maximum price per MWh set by the government.
According to DECC, the clearing price for solar came in at up to 58 percent lower than the price would have been without competition, offshore wind was 18 percent lower, and onshore wind was 17 percent lower.
The two approved offshore wind projects — East Anglia Phase 1 and Neart na Gaoithe — offered strike prices varying between £114.39 and £119.89 per MWh, while the onshore wind farms contracts equated to more than 748 MW of capacity, with average strike prices for each year varying between £79.23 and £82.50 per MWh.
Successful projects receive 15-year contracts, and the government says that available funding for CfDs for renewables and carbon capture and storage in future years could rise to over £1 billion ($1.6 billion) per year by 2020-2021. The budget for the next allocation round will be confirmed later this year — £50 million more has already been indicated for established technologies. The CfD programme comes in addition to currently existing support schemes for renewables such as the Renewables Obligation (which it is designed to replace) and feed-in tariffs for small-scale projects.
Both Praise and Concern
Commenting on the contracts, trade group RenewableUK Chief Executive Maria McCaffery said: “The prices achieved by the onshore industry show what utter folly it would be to choke off this low cost form of low carbon power and the results also demonstrate that the offshore industry, provided the conditions are maintained, is well on the path to achieving its stated aim of £100/MWh by 2020.”
However, with the next round of auctions due to take place in the autumn of 2015 — after the UK General Election in May — McCaffery warned: “It is vital that the new government moves quickly to clarify process around the next awards. A level of certainty about both immediate future allocation rounds, but also the long-term vision of decarbonised electricity, and the support needed for it, will ensure projects keep coming forward, at the right price.”
Meanwhile, the Renewable Energy Association’s (REA) Chief Executive, Dr Nina Skorupska, said: “The procurement of significant renewables capacity is beneficial to the UK in terms of meeting our legally binding renewable energy targets in a cost-effective manner, improving energy security and delivering jobs and investment.”
Nonetheless, she also highlighted some issues in respect of government energy policy, saying: “We have longstanding concerns regarding the CfD policy,” and adding that the results of the first round of auctions show “many of these concerns are still valid, for example regarding emerging technologies.”
The REA has consistently expressed concerns regarding the implementation of CfD policy and how the allocation process operates, in particular that no resources have been allocated to converting coal-fired power stations to biomass, a quick to deploy, cost-effective method of securing large amounts of flexible capacity at a time when the UK faces a potential generating shortfall. In addition, the REA has also expressed concerns that more of the available budget has been allocated to higher cost renewables, rather than to the cheapest.
However, the strongest criticism has come from the solar sector, which won only five of the available contracts, with only two to be built the coming financial year and three in the next. This compares with offshore wind, for example, which secured 15 of the contracts available.
Paul Barwell, CEO of the Solar Trade Association, said: “Unfortunately this result is as disappointing as we predicted. The soon to be cheapest and most popular renewable — solar power — has lost out in a complex auction scheme that favours big players and genuinely established technologies.
“Is a policy that trips up the UK’s emerging solar industry really a successful policy? We don’t think so. It is essential that changes are made to the next round of auctions in October to ensure that smaller UK solar companies can have the confidence to enter.”
Alex Fornal, head of project development at Juwi, observed: “For us the results speak for themselves. Wind has apparently taken all or most of what was an already a miniscule CfD budget. If there were any successful solar farms they have taken up whatever ‘crumbs’ were left over after wind projects were granted CfDs. We are very disappointed but we will now look to the next government to apply a more sensible budget to the next allocation round this coming October — a budget that is fit for purpose and that provides the support for solar that it deserves.”#rewpage#
Indeed, Greenpeace Chief Scientist Dr Doug Parr said: “We’ve known onshore wind is much cheaper than nuclear for a while, but now we learn that solar power is already cheaper than new gas generation in some cases. It makes you wonder what could have been achieved with less party-political manoeuvring and more stable government support for the clean technologies already being embraced by the world’s largest economies.”
Overall Policy Criticized
And, while some technologies evidently argue they deserve more from the current support mechanisms, other more fundamental criticism has been levelled at wider UK energy policy.
In a position paper from the Energy Futures Network titled: “Competition, Regulation and Reform in the Electricity Sector,” Professor Dieter, helm of the University of Oxford, pointed out that in the last couple of years the coal price has halved, and in 2014 the price of gas fell by over a quarter. However, the wholesale price of electricity in Britain is almost twice the level in northern Europe while capacity margins have tightened and retail prices have not reflected the underlying fossil fuel prices. “The British electricity sector is therefore failing on all three main objectives: security of supply, carbon emissions and competitive pricing,” said Helm.
He argued that a comprehensive package of measures could put the industry back on a sustainable basis of workable competition, in the context of significant consumer protection and the attainment of the climate change policy objectives. “All are practical and evolutionary, and could be implemented quickly,” Helm stated.
Outlining his proposed solution to the challenges, Helm said: “In principle, each market failure needs a separate policy instrument, and the obvious answers are to fix the quantity and auction it; and to set a carbon price. There would be a single capacity auction, into which all the options could bid (demand reductions, new coal, gas, wind, solar, nuclear and so on). The firm-power contracts would be awarded to the lowest bidder, with credible penalties for non-delivery. Those technologies that are intermittent would sub-contract for back-up and hence face the full costs of the intermittency.
Helm continued: “These bids would be net of the expected carbon price, either established in a permits trading regime or (better) through a carbon tax. The single unified auction solves other problems too. In particular it puts entrants on the same basis as incumbents.”
Helm placed these proposals in the context of UK energy policy.
“It is far from obvious that piecemeal change will additively improve competition, though a number of the measures are justified on a stand-alone basis. The highly political controversies need a permanent solution, and not just a series of ad hoc reforms,” said Helm. “The package is simple to state: a Pool wholesale market; a unified capacity and FiT auction (or a two-stage auction if technology choice is to be made by government), and a default tariff.”
Indeed, commenting on the development, Clare Hatcher, partner at London-based law firm Clyde & Co LLP, said: “In terms of CfDs and capacity auctions, they show that the new regime is struggling a bit to achieve the government’s three objectives, which is low cost energy, carbon reduction and security of supply. In practice, the capacity market auction is not going to achieve what’s really needed, which is to have an excess of capacity available as a reserve margin.”
Lead image: Parliament via Shutterstock