Overview
The Contracts for Difference (CfD) scheme is the Government’s main support mechanism for enabling low-carbon electricity generation. The CfD scheme is designed to incentivise investment in renewable energy by providing developers with a degree of revenue stabilisation to protect from volatile wholesale prices, while also protecting consumers from paying increased support costs when electricity prices are high.
Delivery Partners
The Contracts for Difference (CfD) scheme is the Government’s main support mechanism for enabling low-carbon electricity generation. The CfD scheme is designed to incentivise investment in renewable energy by providing developers with a degree of revenue stabilisation to protect from volatile wholesale prices, while also protecting consumers from paying increased support costs when electricity prices are high.
There are three key entities responsible for facilitating the CfD scheme:
- Low Carbon Contracts Company (LCCC): A private company owned by BEIS, LCCC is counterparty to the contracts awarded in CfD allocation rounds. Its primary role is to issue contracts, manage them during the construction and delivery phase, and make CfD payments.
- National Grid ESO: The Delivery Body for the CfD scheme. National Grid administrates CfD auctions and the CfD allocation process.
- Ofgem: Responsible for hearing appeals.
How it Works
Renewable generators that meet the eligibility requirements can apply for a CfD by submitting a ‘sealed bid’, meaning no information is provided on competitor bids, during pre-determined Allocation Rounds (AR), or auctions.
The auction structure and parameters are determined in advance, including budget allocations and caps on the total generation capacity to be delivered through the Allocation Round. Technologies are divided into different Pots and auctions take place within a technology Pot, not between Pots.
- Pot 1 includes more established technologies, such as solar and onshore wind
- Pot 2 includes less established technologies, such as offshore wind and biomass
Projects are considered for acceptance in order of Strike Price bids (cheapest to most expensive) not in order of valuation. Once a project is accepted it cannot then be rejected. An Administered Strike Price (ASP) for each technology is determined in advance which sets an upper limit (ceiling) on bids.
There have been three Allocation Rounds to date, only one of which (AR1) was open to Pot 1 technologies. Pot 1 has been reopened for AR4, which is scheduled to take place in late 2021. Further Allocation Rounds are scheduled to be conducted every 2 years moving forwards. Draft auction parameters for AR4 are due to be announced in spring 2021.
BEIS consulted on proposed changes to the CfD scheme in spring 2020. There were several significant changes proposed, including to Pot structure, with the possibility of introducing a Pot 3 exclusive to offshore wind projects, as well as several technical changes to the scheme, including extending delivery years to 2030 and changes to auction delivery parameters.
Solar Energy UK Recommendations
The association has 5 key recommendations to improve future CfD rounds to better support the development of solar and storage projects:
- Auctions should be held at least annually: Multiple independent analyses have shown that it will not be possible to deliver the capacity of renewable generation needed to achieve net zero by 2050 if auctions are only held once every two years. Regular solar auctions are needed to send a clear signal to investment markets and to better align with the rapid pace of solar development.
- Robust budget and capacity caps for Pot 1: It is the association’s view that there should be no need for a capacity cap for Pot 1 technologies. A budgetary cap only should be all that is necessary to create the desired competitive tension, and this should be set high enough for established technologies to deliver a clear signal of the volume of capacity that is needed. If capacity caps are imposed, the association recommends at a minimum Pot 1 capacity caps targeted to deliver between 1.5-2GW of additional solar capacity annually.
- Certainty of continued access to CfDs: A one-off allocation round for solar projects, as happened previously, creates uncertainty and will not generate the pipeline of projects needed to meaningfully advance the Government’s decarbonisation objectives. Certainty regarding the continued availability of the CfD mechanism will increase the cumulative capacity of solar projects bidding into CfDs, which in turn will increase strike-price competition and deliver benefits to consumers, alongside increased renewable energy deployment.
- Well targeted Administrative Strike Prices: It is essential that the Government set the ASP for solar at an appropriate level to balance competitiveness with net zero objectives.
- Increased access for co-located solar and storage: Promoting co-located projects via CfDs could have system wide benefits, as well as those which flow directly to the developer and consumers. Defining co-located solar and storage projects as an eligible technology would remove a major barrier for storage in accessing CfDs.