Analyst Cornwall Insight reports that applications for the UK government’s largest ever Contracts for Difference (CfD) auction have closed with applicants competing for a portion of £285 million year worth of investment in a wide range of both established and less established renewable technologies. Allocation Round Four is aiming to secure around 12 GW of new capacity with onshore wind and solar included for the first time since 2015.
The government has committed to increasing low carbon power generation, and with a 2050 target date for net zero, a significant increase on current production levels will be needed. But despite relatively high procurement expectations, stiff competition among developers (which will weigh on bid prices) means many are exploring other routes into the market in case they prove more attractive.
Auctions will happen later this year with applicants bidding for funding from one of three pots. Pot 1, newly reinstated established technologies including onshore wind and solar, has a 5 GW capacity cap. Cornwall Insight’s own analysis suggests that there is over 25 GW of Pot 1 technologies in the pipeline; however, eligibility criteria for the auction including a confirmed grid connection, as well as planning permission being granted, has left much of this unable to apply in this round.
Pot 2 is earmarked for less established technologies with ring-fenced budgets for both floating offshore wind and tidal stream technologies, while offshore wind is separate in Pot 3. With no capacity cap, a £200 m budget, and amid a government target of 40GW of offshore wind by 2030, the Pot 3 auction is likely to secure the largest amount of capacity. However, with Cornwall Insight’s Renewable Pipeline Tracker estimating that upwards of 65 GW of offshore wind is in development, developers without both planning and grid connections will be hoping the ambition of future allocation rounds meets or exceeds that of AR4.
Tim Dixon, Lead Analyst at Cornwall Insight, commented: “With the applications for Contracts for Difference now closed, developers will be turning their attention to the bidding process. A more inclusive funding round from the government has also come with high levels of competition, likely to push down bids. Newly reinstated wind and solar is practically certain to have clearing prices lower than the last auction in 2015, whilst it will be interesting to see if previous record low bids for offshore wind will be broken. The added ongoing reforms to network charging regimes complicate things even further, and the uncertainty about future costs and revenues will also no doubt affect the price of bids.
“Developers will need to bid competitively in order to secure a contract. Many will be pushed to seek alternative routes to market, whether this is selling electricity subsidy free to a utility via a long-term power purchase agreement, or to an end user via a Corporate PPA. Some may even hedge their capacity across more than one route to market.”