The UK government has announced that the fourth round of its Contracts for Difference (CfD) scheme will aim to double the capacity of renewable energy agreed in the last round, suggesting as much as 12 GW of new clean power capacity could be awarded. Not only that, but the 4th Round, which will open in late 2021, will broaden the range of renewable energy technologies eligible to participate and provide separate funds, known as ‘pots’, for those the government wants to encourage.
Pot 1 is reserved for solar power and onshore wind, which were excluded from the 3rd Round. Pot 2 aims to encourage less developed technologies, such as floating offshore wind, advanced conversion technologies and tidal stream projects. Pot 3 is reserved for offshore wind with traditional fixed-base foundations. The government has already announced big plans for offshore wind – a quadrupling of present capacity to 40 GW by 2030. In a further change, former coal-burning power stations which have converted to biomass will be excluded from future CfD rounds.
The UK’s CfD scheme has already delivered results – both for project developers and consumers. Developers bid into an auction to win capacity additions at a fixed price – known as the ‘strike price’. The competitive nature of the auction process drive prices down to get consumers the best deal, but developers are awarded 15-year contracts to sell their electricity at the price agreed.
With a government-guaranteed future revenue stream, developers can then raise finance for their clean energy projects, attracting private capital into the renewable energy sector.
In the last round, prices for offshore wind were awarded at record low levels of between £39.65/MWh to £41.61/MWh in 2012 prices. Adjusting for inflation since then gives a value of about £46/MWh in 2019 prices and around £50/MWh in 2024, when the projects awarded in the 3rd round will start to generate electricity. The UK Department for Business, Energy and Industrial Strategy forecasts in its reference scenario that wholesale electricity prices in 2024 will be £59/MWh in 2024.
While there is always uncertainty with regard to forecasts, this suggests that the 3rd Round projects will be the first to pay money back to the government because wholesale electricity prices will be higher than the strike price. And with interest rising in renewables as the UK government unfolds its plans for a Green Industrial Revolution, the 4th Round is set to be every bit as competitive as the third.
Photo credit: shutterstock.com, DJ Mattaar