Renewables ‘project economics’ receive UK auction boost

Ronan Lambe and James Todd of Pinsent Masons, who specialise in offshore wind and other renewable energy and cleantech projects, were commenting after the UK government said a “record smashing” 131 clean energy projects had been successful in the allocation round six (AR6) of its CfD auction process. Pinsent Masons has advised on several of the projects that successfully bid in the latest auction.

CfD auctions are a competitive process, designed to incentivise the development of new low carbon generation, through which businesses can bid to be allocated a proportion of financial support that the government makes available for allocation through the auction. They are the government’s primary method of supporting investment in renewables.

Businesses successful in the auction are invited to conclude CfDs with the government. These CfDs offer them certainty in respect of the price they will obtain for supplying their energy – known as the ‘strike price’ – and protect them against volatile wholesale prices that can affect work on projects that have high upfront costs and long lifetimes. The auctions also protect consumers from paying increased support costs when electricity prices are high.

In the latest auction, the government has allowed bids from developers who had been awarded CfDs for projects in previous auctions but who had then scaled back those projects as a result of macroeconomic headwinds in recent years.  It also increased the overall budget for the auction by 50%. The changes have resulted in nine offshore wind projects being allocated capacity from the latest auction, up from none in allocation round five (AR5). Onshore wind, solar and tidal energy projects were among the other projects that were successful with bids. The government said the capacity allocated in AR6 is enough to power the equivalent of 11 million homes.

Lambe said: “The extent of capacity awarded CfDs in AR6 is a significant good news story for the industry. While not necessarily a surprise given the boost afforded to the AR6 budget at the end of July and the more market-reflective administrative strike prices set, the new government should be commended for recognising the critical and time-sensitive need to provide a secure economic footing for a significant portion of new renewables capacity. Every megawatt of the almost 10 gigawatts of capacity awarded AR6 CfDs today will be crucial if the UK is to decarbonise its grid in 2030 and achieve its net zero target by 2050.”

“Given the disappointment of AR5 where no fixed bottom offshore wind projects secured CfDs, it is heartening to see almost 5GW of this technology secure AR6 CfDs. One hopes the strike prices secured by the fixed-bottom offshore wind projects successfully awarded CfDs in AR6 will ensure these projects can rapidly secure the investment required to ensure they are fully built out and contribute towards our offshore wind and net zero targets,” he said.

Todd added: “The fact that a number of offshore wind projects utilising fixed-bottom technology have secured AR6 CfDs in respect of capacity which was previously covered by CfDs from prior allocation rounds is significant. It demonstrates that there is flexibility within the CfD regime to address scenarios where macroeconomic events have detrimental impacts on project economics. The lengthy consenting and project development timescales for such projects, together with the unpredictability of wider economic circumstances in recent years, means that maintaining investor confidence is essential. Flexibility in approach and an overriding focus on the strategic goal of maximising generation will be key to maintaining that confidence and to demonstrating the UK’s support for offshore wind.”

“Put simply, every megawatt of currently planned offshore wind capacity is needed and where project economics have been negatively impacted by factors outside of developers’ control, it’s in everyone’s interest that the CfD regime provides solutions to ensure that good projects don’t wither on the vine,” Todd said.

In announcing the results of AR6, the government said that energy secretary Ed Miliband “is working with the industry to accelerate ways that the Contracts for Difference system and other energy policies can be expanded, so that more renewable energy, including offshore wind, can be connected to the grid, and quicker”.