Labour ups the CfD budget

Ed Miliband, Secretary of State for Energy Security and Net Zero, has announced a significant jump in the budget for the next CfD allocation round from £1 bn to over £1.5 bn. 

This is lower than the doubling of the budget that many in the industry had called for, but it is a very significant increase. It will ensure that Allocation Round 6 brings forward significantly more renewable energy capacity towards the new government’s ‘Clean Power Mission’.   

Regen warmly welcomes the budget increase. 

“The new Labour government has boosted the renewable energy sector with a 52% increase in the budget allocation for the next CfD round. It’s now up to the industry to come in with competitive (but realistic) bids that will capitalise on the opportunity to build more renewable energy projects.  

We are looking forward to the auction results and discussing how to further accelerate renewable energy deployment towards the government’s ambitious clean power targets.” 

– Johnny Gowdy, director, Regen  

 The budget increase has been split across the CfD budget pots, as shown in Table 1. 

As expected, the biggest uplift is for offshore wind. How much extra capacity this will bring forward will depend on the final auction clearing price but, as a rough calculation, we would expect the uplift to increase the contracted capacity from 3-4 GW to 5-6 GW. A low auction price could see capacity at the upper end of our forecast. 

Around 6 GW of new projects would be a positive result, although still well short of the amount required to meet the government’s 2030 clean power targets.  

There are also significant budget increases for solar PV, onshore wind and emerging technologies. The uplift in Pot 1 will support more onshore wind projects in Scotland and Wales and large-scale solar PV across GB. However, this CfD round comes too early for onshore wind in England, as there are no sufficiently advanced projects in the pipeline.  

The major budget increase for Pot 2 ‘emerging technologies’ could be crucial for getting floating wind projects off the ground. We expect the auction price for floating wind projects to be at or close to the strike price limit of £176 per MWh. 

The Pot 2 increase will also support more tidal development. Tidal stream did well in AR4 and AR5, with awarded projects totalling 88 MW across both rounds. As such, it will be interesting to see how many projects are in the pipeline for AR6.

Given the timing of the allocation round, increasing the budget allocation was the only option available to the government to support more renewable deployment. For Allocation Round 7, the government has greater scope to change the auction parameters – and maybe even the auction format itself. One item on the agenda must be to review the methodology used to calculate the allocation budget and the underlying forward market reference price. Regen has argued that the current methodology overestimates the projected cost of supporting renewable energy, limiting the government’s ability to support more capacity. 

Deep dive: CfD budget allocation explainer 

Contracts for Difference provide renewable generators with a fixed price for the energy they produce. This is known as the ‘strike’ price. Under the contract terms, the government will pay the generator the difference between the electricity wholesale and strike prices, topping up any revenue shortfall. The payments come from the ‘environmental levy’, which is recovered from electricity bills. BUT – it’s a two-way deal. If the wholesale price exceeds the strike price, the generator will pay back into the environmental levy, as they did during the recent energy crisis. 

So, if the strike price – set by a competitive auction – is lower than the prevailing wholesale price, this is a great deal for GB consumers. More renewables get built because generators have revenue security, but the consumer gets energy at a low guaranteed price, protecting us from future energy price shocks. 

The allocation budget is currently based on a worst-case scenario that future wholesale prices (the forward wholesale market reference or index price) will be exceptionally low, resulting in the government regularly paying generators a CfD top-up. In effect, the budget allocation limits the capacity of renewable generation that can be awarded a CfD. It also has the effect of making the CfD auction more competitive. 

Regen has argued that the methodology to calculate the forward market reference price is flawed and overestimates the cost of supporting the CfD scheme. This means Labour has room to support more projects for the same budget if they choose to review the methodology for future allocation rounds. If the previous government had set higher CfD budget allocations and built more renewables, this would have saved consumers hundreds of millions during the recent energy crisis and protected us from future price spikes. 

We set out our ‘progressive agenda’ for market reform, including reform of CfDs, in our recent paper, Progressive market reform for a clean power system.