The UK government is seeking views on a major reform to the flagship renewables contracts for difference (CfD) scheme that could help drive further investment in renewable energy deployment and improve energy security.
The CfD scheme is the government’s mechanism for supporting new British low-carbon electricity generation projects, such as offshore wind and solar developers, and along with FIDER, an early form of the scheme, has awarded contracts to new low carbon projects in Britain with a total capacity of 26.1 GW.
Introduced in UK in October 2014, the CfD is based on a difference between the market price and an agreed “strike price.” CfDs are awarded for period of 15 years and are concluded between the renewable generator and Low Carbon Contracts Company (LCCC), a government-owned company.
Under the scheme, the CfD Counterparty must pay renewable generator the difference between the “strike price” and the market price if the “strike price” is higher than a market price. If the market price is higher than the agreed “strike price,” renewable generator must pay back the CfD Counterparty the difference between the market price and the “strike price.”
The scheme’s competitive nature has successful placed downward pressure on prices since the first auction was held, with the per unit (MWh) price of offshore wind dropping by almost 70% between the first auction in 2015 and the latest in 2022.
Currently, CfDs are awarded based on the bid price submitted by renewable energy generating stations—the aim being to increase deployment and ensure good value to electricity consumers and, over time, drive down costs.
The government is now seeking evidence and views about reviewing applications on their ability to deliver low-cost renewable energy deployment, and how much a renewable energy project contributes to the wider health of the renewable energy industry.
These reforms could see applicants considering overall costs alongside other ‘non price factors’ such as supply chain sustainability, addressing skills gaps, innovation, and enabling system and grid flexibility and operability when submitting their bids, which could help drive investment in the sector, grow the economy, and boost the country’s energy security.
More investment in supply chain sustainability, for example, would help to reduce its carbon impact and access the resources and materials it needs to deploy sustainability at scale in the longer term. Investment to address the skills gaps would help to train the necessary technicians to deploy larger renewable energy generation stages.
The UK’s Minister for Energy Security and Net Zero Graham Stuart said: “Our flagship CfD scheme has been hugely successful in supporting British low-carbon electricity generation, while also driving down costs for the benefit of consumers.”
“But we want to go further to ensure we maximise the scheme’s potential to improve energy security and ensure renewable energy developers can make the necessary investment in supply chains and innovation, which will ultimately make for a stronger sector and help our economy to grow,” he added
He went on to say:“This potential reform to the scheme to introduce non-price factors presents a solution to grow the renewable energy supply chain as we accelerate our energy transition plans to power more of Britain from Britain.”
CfDs have already helped accelerate plans to diversify, decarbonise, and domesticate the UK’s energy supplies, with the last round (AR4) securing almost 11 GW of low carbon capacity—enough to generate sufficient electricity to power 12 million British homes.