To encourage investment in the renewable energy sector and enhance the country’s energy security, the UK Government is proposing changes to the Contracts for Difference (CfD) scheme, which provides support for low-carbon electricity projects, including offshore wind and solar. Under the proposed changes, applicants will be rewarded for including “non-price factors” in their bids, such as supply chain sustainability, skills gaps, and innovation. This would lead to a stronger sector, better energy security, and more high-quality jobs in green industries.
What are the Contracts for Difference scheme?
The Contracts for Difference (CfD) scheme is a UK government initiative designed to support low-carbon electricity generation by providing developers with a guaranteed price for the electricity they generate for a set period. Under the scheme, renewable energy projects, such as wind, solar, and biomass, compete for contracts, which guarantee a set price for electricity over a 15-year period.
The scheme is aimed at providing long-term price certainty to encourage investment in renewable energy projects, which can reduce greenhouse gas emissions and improve energy security. The CfD scheme is an important part of the UK’s strategy to meet its target of net-zero greenhouse gas emissions by 2050.
What changes are being made to the scheme?
Graham Stuart, the Minister of State for Energy Security and Net Zero, has praised the success of the CfD scheme in supporting the generation of low-carbon electricity in the UK and reducing costs for consumers.
To further enhance the effectiveness and potential of the scheme, Stuart has proposed the inclusion of non-price factors that would enhance energy security and incentives renewable energy developers to invest in supply chains and innovation. He believes that this move will lead to a stronger sector, stimulate economic growth, and accelerate Britain’s energy transition plans to achieve greater self-sufficiency in power generation.
How are CfD contracts awarded?
Contracts for Difference (CFD) contracts are awarded through competitive auctions. Developers of clean energy projects bid for the contracts, providing information on the size of their project and the strike price for the project, which is the amount they want to be paid per megawatt hour (MWh) of electricity they produce. The government sets a pot of money for the auction in advance, representing the total amount of money available for the auction.
The auction is administered by National Grid, and bids are ranked from lowest to highest based on the strike price. The lowest bids are accepted until the maximum budget has been reached. The government also sets administrative strike prices (ASPs), which cap the maximum amount a project can bid for. Renewable projects bidding into the auction cannot bid over the amount of the ASP.
Competition for CfDs is intense, with renewable companies striving to put in the lowest bid possible to secure a contract. In addition to the budget cap, there is also a total capacity cap of 6GW. This means that a project that would not breach the budget but would mean the auction delivers over 6GW of capacity would not win a contract.
Why is this favourable?
The Contracts for Difference (CfD) scheme offers investors a stable outlook for their investments, as they receive a predetermined price for every megawatt-hour (MWh) of electricity they generate. In an unpredictable energy system, investors are exposed to various risks. As a result, the higher the risk perception of the project, the more expensive it becomes to secure financing from banks or investors, with an increased “cost of capital”.
What happens after CfD schemes are awarded?
Once the auction results are disclosed, the project developers must make a Final Investment Decision on whether to proceed or not. They are required to take this decision within one year of the auction or prove that they have already spent 10% of the overall project cost, known as the Milestone Delivery Date (MDD). After this point, the firms move ahead at full speed, as they finalize procurement and construction plans to meet their Delivery Year.
What are some upcoming renewable projects in the UK?
To support the development of offshore wind farms, the government has permitted a range of options for new independent projects. This includes onshore and offshore wind farms, with a target of increasing renewable capacity to 40GW by 2030.
Some of these include:
Dogger Bank Wind Farm: This wind farm is set to be the largest in the world and will be located in the North Sea. It will have a capacity of 3.6 GW and is expected to be operational by 2026. The first phase of the project is due to be completed in 2023 and will have a capacity of 1.2 GW.
- East Anglia Hub: This is a joint venture between ScottishPower Renewables and Vattenfall, which will see the development of three offshore wind farms with a total capacity of 3.1 GW. The first phase is expected to be operational by 2025.
- Hornsea Project Four: This is another offshore wind farm being developed by Ørsted and will have a capacity of 1.8 GW. It is expected to be operational by 2028.
- Cleve Hill Solar Park: This is a proposed solar park that will be located near Faversham in Kent. The project is expected to have a capacity of up to 350 MW and could be completed in 2022.
- Kincardine Floating Wind Farm: This is an offshore wind farm located off the coast of Scotland. The project is expected to be completed in 2022 and will have a capacity of 50 MW.
- MeyGen Tidal Energy Project: This is a tidal energy project located in the Pentland Firth, Scotland. The project is expected to have a capacity of 398 MW and could be completed by 2024.
- Rampion 2 Offshore Wind Farm: This is a proposed offshore wind farm located off the coast of Sussex. The project is expected to have a capacity of up to 1.4 GW and could be completed by 2030.
How close is the UK to a decarbonised future?
The UK government has set a target to reach net-zero emissions by 2050, requiring a fundamental change in the country’s energy system. This transition towards clean energy is driven by the urgent need to reduce greenhouse gas emissions and combat climate change.
To achieve these ambitious targets, the UK government is working closely with stakeholders, including energy consumers, network operators, and organisations such as Ofgem and the IEA. It is also collaborating with the European Commission to create a strategic direction towards a net-zero power system.
However, there are still challenges to overcome, such as the need to decarbonize sectors such as transportation and heating, which currently rely heavily on fossil fuels. The transition to a decarbonized future will require significant changes in infrastructure, consumer behavior, and policy, but the UK is making progress towards this goal.
Despite the challenges, the UK is making progress towards a low-carbon, clean energy future. The cost of offshore wind has reached an all-time low, and the wholesale electricity price for wind and solar has become competitive with carbon energy. However, there is still much work to be done to reach net zero emissions by 2050. It will require a tradeoff between cost-effectiveness and the speed of the transition, and the cooperation of all stakeholders in the energy market.
Why are renewable projects important?
Renewable projects are important for several reasons:
- Reducing greenhouse gas emissions: Renewable projects produce clean energy and do not emit harmful pollutants or greenhouse gases. This is important in combating climate change and reducing the carbon footprint of human activities.
- Diversifying the energy mix: Renewable projects diversify the energy mix and reduce dependence on fossil fuels. This helps to increase energy security and stability by reducing exposure to price volatility and supply disruptions associated with fossil fuels.
- Creating jobs and economic growth: Renewable projects create jobs in manufacturing, construction, installation, and maintenance. They also attract investment and contribute to economic growth, particularly in rural areas.
- Improving public health: Renewable projects reduce air pollution, which can have significant health benefits by reducing respiratory illnesses and associated healthcare costs.