Offshore wind sector needs ​a successful contracts for differences round - Billy Kay

​A successful contracts for differences round would be welcome, says Billy Kay

The largest renewable energy conference in the UK returned to its home in Glasgow last week, and it could not be facing a more challenging environment. The UK is about to see network growth on a scale not seen in decades, all to support a 50 per cent rise in electricity use by homes and businesses over the next 10 years and a doubling of the amount of onshore wind in the same period.

Now in its 23rd year, All Energy is an important meeting place for the industry, where all those with a stake gather to share views on technology, investment, policy and how to reach our net zero commitments. Among the talking points this year were battery storage, grid challenges and making projects attractive to investors. But also focusing minds were the latest round of contracts for differences (CfDs) which closed in April, with ‘winners’ expected to be announced in the summer.

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The UK Government’s CfD scheme is its main method of supporting offshore wind development, by holding allocation rounds each year.

Billy Kay is a Partner, Morton Fraser MacRoberts​​​​​​​​​​​​​​​​​​​​​Billy Kay is a Partner, Morton Fraser MacRoberts​​​​​​​​​​​​​​​​​​​​​
Billy Kay is a Partner, Morton Fraser MacRoberts​​​​​​​​​​​​​​​​​​​​​

The UK’s renewable energy strategy is very ambitious: while the current operational capacity stands at only 15GW, it is striving to be able to produce 50 Gigawatts (GW) by 2030. Achieving this goal will be heavily dependent on the outcome of the CfD scheme.

So how do CfDs work? In short, they determine a Strike Price for electricity, ensuring a minimum payment to generators for their power output. When the wholesale price of electricity changes, energy generators either receive a subsidy up to the Strike Price or repay any surplus above it, which helps reduce market uncertainty.

There are a few main reasons why offshore wind developers did not submit a single bid in last year’s round.

To set the scene, we must be clear that competition in the international capital investment market is fierce. This can have the effect of making CfD allocation rounds less appealing to investors as they seek potentially higher returns in less developed offshore wind markets elsewhere.

But perhaps more pertinently, the CfD 2023 Strike Price didn’t consider the impact of the high inflation environment in which the allocation round was launched. We saw an example of this in July of last year, when Vattenfall, a major offshore wind developer, announced the suspension of an offshore wind project due to a 40 per cent increase in overall costs.

As well as higher operating costs, investors and developers were discouraged by ongoing concerns over the UK grid connection process, which currently operates on a “first come, first served” basis.

This approach has created delays because speculative applications take precedence over immediately viable renewable energy projects, which results in some developers facing grid connection dates with a 10-year lead time.

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Ofgem and the UK Government announced an Action Plan last year to address some of these problems, and the industry is watching with anticipation to see what impact these measures will have.

Following the outcome of last year's CfD scheme, the UK Government has increased the maximum prices for offshore wind in the 2024 CfD allocation round – the maximum Strike Price for offshore wind projects has risen by 66 per cent, and by 52 per cent for floating offshore wind projects.

It’s still unclear how effective these actions will be in addressing investor and developer concerns. But a successful CfD round would be welcomed by the industry as a sign of progress for the UK's energy security strategy and in the efforts to meet its renewable energy targets for 2030 and beyond.

Billy Kay is a Partner, Morton Fraser MacRoberts

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