The Department for Business, Energy and Industrial Strategy (BEIS) has published the results of the third round of Contract for Difference (CfD) allocations. Some contracts for offshore wind power have been awarded at strike prices as low as £39.65 per MWh (expressed in 2012 levels). This is 30% cheaper than offshore wind power was two years ago and cheaper than current wholesale electricity prices.
The Contracts for Difference scheme is the main mechanism the UK government uses to incentivise capacity additions in renewable energy. It functions by setting a strike price agreed for energy projects for different technologies. The strike price stabilises generators’ revenues. If wholesale electricity prices fall below the agreed strike price over the lifetime of the project, the Low Carbon Contracts Company (LCCC) pays the difference to the generator. When they are above the strike price, the generator pays the LCCC.
Two years ago, offshore wind set its previous record in the CfD with strike prices as low as £57.50 per MWh at the end of the second allocation round. In that round, 3,196 MW of planned capacity were awarded. At the end of Round III, 5,466 MW have been awarded to offshore wind; a 70% increase over the previous round. The LCCC’s operational costs (the payments it makes to generators) are levelised over business electricity bills. Lower strike prices means that the LCCC pays less to generators, and could reduce CfD charges on business electricity bills. At the low strike price of £36.95 per MWh, wind energy is potentially being developed at zero subsidy.
The CfD supports technologies beyond offshore wind. Purpose-built biomass and CHP have been awarded contracts in previous rounds but have not appeared in Round III. The Advanced Conversion Technologies (ACT) category allows CfD funding to support gasification and pyrolysis projects, which produce clean fuels from waste. The CfD in Round III funded half the total capacity in ACT (33.6 MW) than it did at the end of Round II in 2017 (64.31 MW). Calls have grown in recent years to expand the scope of technologies eligible for CfD funds. Two notable exclusions are onshore wind energy and grid-scale solar photovoltaics. The progress made in offshore wind should now give these technologies a stronger case for inclusion.