Solar Energy UK
15 November 2023
Solar energy is still the most cost-effective way to generate power, despite inflationary pressures pushing up the cost of deployment.
Responding to increases in the cost of equipment, labour and other expenses, the Government announced today that it will increase the maximum price that renewable generation assets may be paid for their power under the Contracts for Difference (CfD) regime.
The administrative strike price for the sixth CfD allocation round will rise by 30% for solar power next year, from £47 per megawatt-hour to £61/MWh. This should deliver attractive rates of return for both the Treasury and developers. An auction process may lower the final strike price, to be set by auction.
The cap for onshore wind went up 66% from £44 to £73/MWh, with less established floating onshore wind rising 52%, from £116 to £176/MWh. In the last round, no bids were made as the strike price was set uneconomically low, putting grid decarbonisation targets at risk. The increase should therefore rebalance and restore confidence in the CfD regime.
While the rises are significant, renewable energy still offers far better value than investing in conventional fossil-fuelled generation, not to mention offering substantial climate benefits. The costs of renewable energy have fallen sharply over the past decade and are vastly lower than that of building and operating combined cycle gas turbine generation.
“The Contracts for Difference system has been a major factor in the growth of the UK’s solar power sector by providing investors with a secure and reliable income,” said Solar Energy UK Chief Executive Chris Hewett.
“Solar remains the cheapest source of power in the UK, according to the Government’s own figures, although lately installation costs have been affected by factors outside the control of the industry, notably the war in Ukraine. So, it is gratifying that the maximum bid price has been raised by a significant amount, which should bolster growth further towards reaching the capacity target of 70GW by 2035,” he added.
CfDs provide a guaranteed income for renewable energy assets, whatever happens to the wholesale cost of electricity. The government pays the difference if the wholesale cost falls below the strike price. If the wholesale cost is greater, then winning firms must pay the difference.
As wholesale costs have been elevated for some time due to the energy price crisis, assets under CfDs will paid paying significant sums to the Government.
Applications are scheduled to open on 27 March 2024, with the winners to be made public in the late summer or autumn. Alternatively, solar developers may seek a route to market through corporate power purchase agreements or through operating as merchant plants – risker, though potentially more financially rewarding.
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