Contracts for Difference (CfD) Scheme consultation updates

BEIS has published its response to a consultation which ran from 2 March to 29 May 2020 on proposed changes to the CfD scheme.

CfDs incentivise investment in renewables by providing generators with protection from volatility in wholesale prices, as well as protecting consumers from paying increased support costs when electricity prices are high. BEIS is proposing to hold Allocation Round 4 in late 2021, and intends to implement a number of changes. These include selection of technologies for support, and their separation between pots with dedicated capacity caps and budgets to ensure that less established technologies continue to be supported alongside more established technologies, and that there is a specific budget for fixed offshore wind. The changes also seek to fix a number of issues identified in earlier allocation rounds, and the consultation response indicates further changes that are being considered for introduction in later rounds.

Supported technologies and structure of pots

The pot structure for Allocation Round 4 will be as follows:

Pot 1 (established technologies): onshore wind (above 5MW), solar PV (above 5MW), energy from waste with CHP, hydro (between 5MW and 50MW), landfill gas and sewage gas.

Pot 2 (less established technologies): advanced conversion technologies, anaerobic digestion (above 5MW), dedicated biomass with CHP, floating offshore wind, geothermal, remote island wind (above 5MW), tidal stream, wave

Pot 3 (offshore wind): offshore wind

The Government has not yet determined budget allocations, administrative strike prices or capacity caps between these pots.

Offshore Wind:

The consultation sought views on whether to retain the current two-pot structure, or whether to separate offshore wind into a third pot. BEIS has decided that offshore wind will be moved to a separate pot (pot 3) so as to set specific budgets and capacity caps for this technology, given the significant cost reductions over the past few years and its scale relative to other less well established technologies in pot 2.   This also allows a specific budget for offshore wind, to support the industry in achieving the significant growth required by the recent 10 point plant (see here for our blog post on this).

Floating Offshore Wind:

Floating offshore wind will be placed in pot 2 to compete with other less established technologies. Floating offshore wind projects are defined as floating turbines in offshore water depths of at least 45 meters (reduced from 60 meters to reflect consultation responses).

Bioenergy:

Dedicated biomass with CHP and anaerobic digestion will be placed in pot 2.

Coal-to-biomass conversions have been excluded from Allocation Round 4. BEIS has however stated that this decision does not affect its view on the application to carbon capture and storage on biomass conversions and other forms of bioenergy generation (BECCs) (which it is continuing to consider).

Government intends to publish a comprehensive “Biomass Strategy” in 2022.

Extension of delivery years to 2035

There will be an amendment to the Contracts for Difference (Allocation) Regulations 2014 to extend “delivery years” to 31 March 2035. This will allow allocation rounds to be conducted for delivery years to 2034/2035. The Government has not however indicated the timing of future allocation rounds.

Community benefits

BEIS will update the 2014 Community Benefits and Engagement Guidance for Onshore Wind. This is intended to be published by Summer 2021. This will remain limited in application to onshore wind with BEIS deciding against expanding the scope of the guidance to other technologies. It is also considering commissioning a register of renewable projects in England and associated benefits to local communities. BEIS intends to conduct further consultation on this proposal.

Negative pricing

BEIS will extend the negative pricing rule for future CfD contracts so that CfD generators are not paid when ‘day ahead’ electricity market prices are negative. The government intends to incentivise generators to divert power (including by use of co-located storage) or build in greater flexibility to avoid generation in periods of negative pricing. BEIS’ modelling anticipates increasing periods of negative pricing, and intends to issue a call for evidence on measures to deal with this issue.

Administrative strike price

BEIS has decided to continue to set administrative strike prices on the same basis as for previous rounds, but with a broader discretion as between technologies. It will continue to publish its methodology when announcing the budgets for each pot.

Decommissioning

BEIS has decided not to proceed with linking offshore renewable energy installation decommissioning regimes with the CfD mechanism, with the intention that these regimes will run in parallel and separately for the time being. It remains possible that decommissioning and the CfD will be linked in Allocation Round 5.

Non-delivery disincentives

Non-compliant generators will be barred from participating in the subsequent allocation round (extending the period of exclusion to 36 months). BEIS has decided however not to introduce bid bonds, but is continuing to consider this option for further rounds (and expects to consult further on this approach).

Supply chain

BEIS intends to strengthen the existing Supply Chain Plan (SCP) process requiring applications to demonstrate a clear and sustainable supply chain including by updating the plan following CfD award and monitoring compliance. BEIS intends to develop criteria for the SCP to support UK jobs, innovation and exports.

BEIS has launched a further consultation to invite views on more detailed changes to the SCP policy.  The consultation provides copies of the draft amended CfD contract and draft Supply Chain Plan Guidance documents and will run from 24 November 2020 until 18 January 2021.

HSF will publish further details on this consultation in due course.

Storage

No changes are proposed to Allocation Round 4 to incentivise co-location of energy storage. BEIS indicates that further work is required to understand the barriers to co-location of storage and flexibility, and intends to issue a call for evidence on this topic. Changes may therefore be incorporated into future rounds.