Utility Week

22 | APRIL 2022 | UTILITY WEEK Generation Analysis CfD auctions take centre stage Will holding Contracts for Difference auctions annually be enough to deliver the tens of gigawatts of low-carbon generation needed to get to net zero by 2035? T he first competitive Contracts for Differ- ence (CfD) allocation round took place in 2015 but since then only two more have been completed, in 2017 and 2019. The fourth round – the largest to date – is cur- rently ongoing, having opened to applica- tions towards the end of last year. The CfD scheme is now widely regarded as one of the success stories of UK energy policy in recent years, rapidly driving down the costs of offshore wind to just £39.65/ MWh (2012 prices) in the 2019 auctions. One of the main reasons for its success is the certainty it provides. By guaranteeing a fixed price for electricity, the 15-year con- tracts have lowered the cost of financing pro- jects, which are less exposed to price risks. However, the scheme has also been a source of uncertainty, with little clarity over when exactly auctions will be held and what technologies will be able to participate beyond the next round. Onshore wind and solar projects in par- ticular were le' in a holding pattern a'er the government withdrew support in 2015, excluding the technologies from the second and third allocation rounds and closing the Renewables Obligation and Feed-in Tariff schemes to new applicants over the follow- ing years. Ministers argued that these technologies were sufficiently mature to make it on their own but a'er a last minute dash to grab the last of the outgoing subsidies, instal- lations plummeted and have remained in the doldrums ever since. Despite persistent petitions by developers, this position was maintained for nearly half a decade. Things finally began to change in early 2020 when the government revealed that onshore wind and solar would be able to par- ticipate in the fourth CfD allocation round, which would include both a pot 1 auction for these "more established" technologies as well as new third pot dedicated specifically to offshore wind. But the completion of this turna- round came in February this year with the announcement that allocation rounds would now be held annually and would all include pot 1 auctions. Edward Pizzey, research associate at Aurora Energy Research, says these changes are "definitely needed" if the government is going to meet its climate commitments, par- ticularly a'er it pledged to get the power sec- tor to net zero by 2035 – 15 years earlier than the economy as a whole. Even with the accelerated build-out of off- shore wind, overall renewables deployment peaked in 2015 and "since then it's dropped off quite significantly", meaning we've been le' with a "mountain to climb". Depend- ing on what scenario you go by, the UK will need deploy in the region of 6GW to 8GW of renewable generation every year going for- ward, Pizzey explains. This will need to include onshore wind and solar and "it's clear that renewables weren't quite ready to go merchant, espe- cially not a year ago before these crazy prices. It was quite obvious that merchant onshore wind and solar was still a little way off when they pulled the plug, maybe a little prematurely". "We had forecast merchant renewables kick-off in the mid to late 20s in terms of onshore wind and solar and that's just too late at that point," he adds. Costs have fallen significantly but Pizzey says the price certainty CfDs provide remains important, "especially as we move to a net -zero world where the wholesale market could become increasingly volatile". The growing volume of subsidised renew- ables will mean there's "a lot of stuff setting a very low marginal price on the wholesale market – effectively zero because they're paid up until six consecutive zero hours. "If there's a system where there's a lot of low prices because there's lots of renewables on the system, potentially that CfD is quite attractive to have if you can look past these crazy high prices over the next five years that are probably obscuring the view." He continues: "I'm not saying merchant

• Cover