The future of Contracts for Difference: Department for Business, Energy, & Industrial Strategy's proposed changes
Any changes will not be retrospective, but will take effect in future Allocation Rounds, the next being scheduled for 2021.
We set out below some of the key changes put forward in the consultation.
First, BEIS has proposed a number of changes to the “technology pots” used for CfD:
- Pot 1, for established technologies including onshore wind and solar PV, will be available again in the next CfD round. It is not clear what impact (if any) there will be on the ongoing judicial review of the last CfD round, which excluded (most) onshore wind.
- Creation of a new separate Pot 3 for offshore wind which will take it out of Pot 2. This is welcome recognition that offshore wind is more established and has greater scale. It also allows genuinely less established technologies such as remote island wind, wave, tidal stream, ACT, AD, dedicated biomass with CHP and geothermal, which are currently also covered by Pot 2, to complete on a more level playing field.
- The inclusion of a separate technology definition for floating offshore wind within Pot 2, with a separate administrative strike price. Floating offshore is at an earlier stage of development than its fixed-bottom relatives, so separate treatment would encourage further projects. However, the proposed definition specifically relates to water depths over 60 meters, which may preclude the addition of small scale “add-on” demonstrator projects to existing offshore wind farms.
Continued deployment of a wide range of technologies is required if we’re to meet the 2050 Net Zero target. The consultation recognises that some onshore technologies are not only cheaper than offshore but that both onshore and floating wind can bring diversity benefits in terms of geography, the nature and times of output. Use of all available technologies will be increasingly important as we decarbonise other parts of the economy like heat and transport, with electricity demands set to rise accordingly.
The move towards a whole system view is also positive as we approach the 2050 target, including recognition that storage and in due course hydrogen must play an increasing role as intermittent generation becomes a bigger and bigger part of the mix.
Community support is another key theme, one that’s very relevant to onshore wind. The consultation talks about greater community engagement, updating the community benefit scheme and maintaining a register of renewable energy developments and community benefits. It’s important to recognise that good community engagement is vital. However, one area which is not covered in the consultation is any corresponding change to the planning regime. In England, due to changes introduced in 2015, local communities have the final say on onshore wind. This is an area that will need to be re-visited if we are to unlock further development of onshore wind in earnest.
The consultation also suggests that there will be more emphasis on supply chain plans. This is potentially a way for BEIS to both play up its Business and Industrial Strategy roles (while wearing its Energy hat) and to help stimulate a boost for UK plc. However, the method and extent of this will need to dovetail with post Brexit trade arrangements.
Decommissioning is also an area considered in the consultation. Government wants to “ensure decommissioning obligations are taken seriously”, but Government itself also needs to address allocating greater resource to the approval of offshore decommissioning plans. On a practical point, we question whether the CfD scheme is the best place to address decommissioning obligations and concerns; the generation licence might be a more appropriate home. For example, OFTOs have an obligation in their transmission licence to start setting aside funds for decommissioning in later years; the generation licence could do the same. If the aim of the CfD support mechanism is to gradually to wean projects off subsidy and move them closer to merchant status, then the generation licence would again be a better place particularly as not all future projects will have a CfD but they will have a generation licence.
The next CfD Allocation Round will be in 2021, with further rounds held every two years thereafter. The consultation also proposes to extend CfD delivery years until March 2030 rather than end them in March 2026 as currently planned. This sends a clear and welcome message to developers and their supply chains that clean energy generation is set to continue.