Out-Law Analysis | 28 May 2020 | 9:32 am | 4 min. read
The proposed changes will, if implemented, take effect from the fourth CfD allocation round (AR4), which is due to take place in 2021.
The focus of the proposed changes is on helping the government meet its legally binding target of reducing greenhouse gas emissions to net zero by 2050. They include extending the CfD scheme from the current end date of 31 March 2026 until 31 March 2030. This would provide further certainty to the industry beyond the government’s existing commitment of holding CfD auctions every two years from 2019, encouraging investment in the deployment of renewable technology projects.
Among the most significant of the proposed changes to the scheme rules are the reintroduction of support for onshore wind and solar photovoltaic (PV) generation, and the recognition of floating offshore wind as a separate generation technology.
The government has proposed reinstating the eligibility of ‘Pot 1’ established technologies to bid for CfDs in AR4, most significantly onshore wind and solar PV technology. The proposed pot structure for AR4 is:
The government is also proposing to introduce a new ‘pot 3’ specifically for offshore wind, in recognition of the significant role this technology plays in decarbonisation efforts. The rationale for this is that separating offshore wind would allow for the delivery of a more competitive CfD auction round and help to diversify the UK’s electricity generation mix. A new pot 3 for offshore wind would also support the UK government’s 40GW offshore wind deployment target by 2030.
Coal-to-biomass conversions can currently apply for CfDs on a competitive basis alongside other pot 1 technologies on a transitional basis, with eligibility due to end by 2027. The government has now proposed removing CfD support for this technology from all future allocation rounds, and is seeking views on this proposed exclusion. Coal-to-biomass conversions would remain eligible to apply to the Capacity Market for support.
The government has clearly taken heed of the many voices which clearly and coherently made the case for onshore wind and solar PV not to be excluded from support under the CfD scheme, and this proposal is very welcome. For many years, it has been apparent that these technologies present some of the lowest cost ways of decarbonising our electricity sector. Although onshore wind farms and solar parks are currently being developed and constructed without access to subsidy or support mechanisms the reality is, without this, deployment is unlikely to come near the pace required to achieve net zero by 2050.
Although it is hard to predict wholesale power prices and the state of the offtake market by the time AR4 opens, for many developers a potential 15 year CfD with the Low Carbon Contracts Company (LCCC) as a creditworthy counterparty will undoubtedly be an attractive proposition.
The government notes in the consultation the important role that floating offshore wind has to play in expanding the geographical diversity of offshore wind projects, and in achieving both its 2030 offshore wind target and net zero by 2050. While ‘fixed bottom’ offshore wind has, in theory, the scalability required to meet these targets alone, the environmental and other impacts of deployment in locations such as the North Sea has increased the attractiveness of floating turbines as an alternative.
The government plans to support the development of floating offshore wind projects from pre-commercial pilots to commercial deployment at scale by the 2030s. To address the difficulties of those projects competing on the same terms as other, cheaper offshore wind technologies, it is proposing to create a legal definition for ‘floating offshore wind’ as a distinct eligible technology within pot 2.
Fixed bottom offshore wind has been one of the UK’s major renewables success stories of the last 20 years. However, the government has acknowledged that more offshore wind than was originally envisioned will be required to achieve its net zero target. As the number of suitable sites in shallower waters around our coasts reduces, we will likely need to look to deeper waters, and floating offshore wind, for a considerable proportion of the shortfall.
Floating offshore wind has huge potential to unlock sites with tremendous wind resources, but it requires support to move from the demonstration phase to true commercial deployment. Inclusion of this technology within AR4 will hopefully be a crucial step in making this move. Combining the new category with the separate proposal to move fixed-bottom offshore wind into its own pot 3 could help to avoid direct competition between the two, as well as direct competition between fixed-bottom offshore wind and other less-established technologies.
In all previous allocation rounds, a project with generation capacity of 300MW or more was required to submit a supply chain plan (SCP) to the government for approval. In allocation round 3, these were exclusively offshore wind projects.
The consultation makes proposals to significantly change the requirements imposed on developers in respect of SCPs to more closely align with the aims of the government’s industrial strategy. In particular, the government is considering how to keep SCP policy relevant to ensure developers encourage competition, innovation and skills in the supply chain, to promote economic growth in project locations across the UK.
The government is also requesting views on whether new measures are necessary to increase compliance and accountability of developers to SCP commitments, and on whether to reduce the 300MW threshold in order to capture smaller projects.
While the government is likely to want to avoid accusations of introducing additional red tape for smaller projects, it is clear from other aspects of the consultation that the wider societal impacts of renewables deployment are high on its agenda. Developers of larger onshore wind and solar projects who are considering applying for CfD support in AR4 should consider what work would need to go into a SCP, should the government decide to lower the capacity threshold at which they are required.
Co-written by Ronan Lambe, James Todd and Fiona Fingland of Pinsent Masons, the law firm behind Out-Law.
07 Mar 2019