Policy Impacts

Is the government realigning the CfD to the net zero target?

Posted on 24 March 2020
By Nick Palmer
Nick Palmer
Editor of Cornwall Insight

As part of the Content Team, Nick is Editor of Cornwall Insight’s flagship publication Energy Spectrum and contributes to the Daily Bulletin, Energy:2030 and Energy Spectrum Australia. In addition to keeping up to date on the pressing issues in energy, Nick has a keen interest in central and devolved governments’ energy policies.

Earlier this month, the Department for Business, Energy and Industrial Strategy (BEIS) published a consultation on proposals for a major reboot of the Contracts for Difference (CfD) scheme. This is the government’s mechanism to support low-carbon generation.

Among the changes was a proposal to reintroduce onshore wind and solar into the scheme for the next auction (the Fourth Allocation Round, AR4), due to take place in 2021.

BEIS’s plan is to feature an established technologies ‘pot’ in the scheme, which has not been the case since 2015.

Adding onshore wind and solar to the pot

Different generation technologies are separated into ‘pots’ to compete for government support (see Figure 1, below).

The proposed inclusion of an established technologies pot (pot 1) in AR4 of the CfD is the single biggest announcement in this consultation.

These technologies have been absent in the last two CfD rounds (AR2 and AR3), and their inclusion has been long sought by opposition parties, as well as industry trade associations and environmental groups.

BEIS said in the document: “…there is a risk that if we were to rely on merchant deployment of these technologies alone at this point in time, we may not see the rate and scale of new projects needed in the near-term to support decarbonisation of the power sector and meet the net zero commitment at low cost.”

A separate pot for offshore wind

One of the other proposals put forward by BEIS is to introduce a new pot 3 exclusively for offshore wind (see Figure 1 above). This technology has sat in pot 2 (less established technologies) in previous rounds.

BEIS argued that having technologies with very different characteristics in the same pot can cause difficulties in creating optimal competitive tension.

For instance, offshore wind differs greatly in size and cost compared to some of the other technologies in pot 2. So separating it will allow more appropriate parameters to be set for each of the pots.

Additionally, BEIS noted that established technologies may also have very different characteristics to offshore wind – such as the varying construction, development timelines and grid connection regimes when compared to solar PV – and therefore allocating these technologies in the same pot may also be inappropriate.

A move to a separate pot for offshore wind will be welcomed by the offshore developer community, as well those remaining technologies in pot 2.

It would also maintain the longer-term certainty set out in the Offshore Wind Sector Deal, while also allowing less established technologies to compete on a more even playing field.

A realignment to net zero

Overall, the proposals align the CfD scheme to the realities of net zero and the need to re-integrate established renewables technologies to achieve this aim.

However, there remain significant questions over the consultation proposals, including budget allocation, capacity constraints and administrative strike prices that will apply to re-integrated established technologies in AR4.

Additionally, BEIS has made no mention of what will happen beyond AR4.

Compared with the firm commitment the government made to provide £557m for pot 2 in auctions every two years – and the Offshore Wind Sector Deal setting out a pathway to hit 30GW by 2030 – this silence over future allocation rounds offers little in long-term certainty for onshore wind and solar.

It will also be interesting to see how the proposals and any future details on AR4 and future allocation rounds will impact on subsidy-free projects.

Beyond the nitty-gritty of how the CfD will change, these proposals represent a significant tonal shift, not just in the government’s attitude towards onshore wind, but in its approach towards net zero.

It has come face-to-face with the reality of this endeavour and is beginning to use the levers at its disposal to push the UK towards the 2050 target.

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