Relief as government confirms increased administrative strike prices for offshore wind

CFD explainer

Administrative Strike Price (ASP)

The ASP sets the upper limit or reserve price for the forthcoming CfD allocation round. In the auction, bids must be below that limit price, and if the auction is competitive, they could be significantly below the ASP. By convention, all ASPs are still quoted in 2012 prices.

Selected ASPs for AR6 per MWh (a full list is provided in Table 1):

• Offshore wind:  £73
• Floating offshore wind: £176
• Onshore wind: £64
• Solar PV: £61
• Tidal: £261
• Hydro: £102

Pots and minima

Technologies and projects compete against each other at auction time but they are grouped into auction pots in order to separate different technology classes, e.g. those that are less established. In AR5, fixed offshore wind was competing against solar and onshore wind, while floating wind was competing against tidal and other “less established” technologies. It is also possible for the government to set a reserve or “minima” budget within the pot for a certain technology that it specifically wants to support. With a higher ASP, offshore wind has been put back into a separate pot for AR6.

AR6 Pot Structure

• Pot 1: Energy from Waste with CHP, Hydro (>5MW and <50MW), Landfill Gas, Onshore Wind (>5MW), Remote Island Wind (>5MW), Sewage Gas, and Solar Photovoltaic (PV) (>5MW).
• Pot 2: Advanced Conversion Technologies, Anaerobic Digestion (>5MW), Dedicated Biomass with CHP, Floating Offshore Wind, Geothermal, Tidal Stream, and Wave.
• Pot 3: Offshore Wind.

Budget Allocation

Rather than a capacity target, the auction operates with a budget allocation for each pot. When the budget allocation is met, the auction stops. The budget allocation is the annual forecast cost (as a levy on bills) that the government is willing to accept and is calculated based on the auction strike price and a forward view of expected wholesale prices, and therefore the expected annual CfD payments that would be made to generators. The assumptions made about future wholesale prices are, therefore, critical.

The Budget Allocations have not yet been set for AR6.

Regen’s response to the announcement

By setting a higher suite of ASPs, the government has recognised the urgent need to get the country’s clean power strategy back on track, following the failure of AR5 to attract a single offshore wind bid earlier this year. This is a very positive response and credit should go to government officials who have worked intensively with developers and industry experts to ensure that the strike prices in AR6 properly reflect the significant hike in project costs that has affected the entire energy sector. Several factors contributed to this, including a jump in commodity, component and construction costs and rising interest rates. Offshore wind has been especially affected because of the rise in the cost of turbines and the international competition to accelerate wind farm deployment.

Offshore wind forms the backbone of the UK’s net zero energy transition and the success of the sector to date has delivered billions of pounds of investment. Increasing the strike price for offshore wind to £73/MWh to reflect the current cost of project development will help to ensure the UK remains an attractive place to develop offshore wind within a global marketplace. It is also good to see that the strike price for floating offshore wind has been increased to £176/MWh, better recognising its early stage of development. The strike prices for geothermal, solar and tidal stream have also all been increased.

By increasing the ASP, which represents the bid ceiling for the auction, government has provided a positive signal to industry and allowed developers to respond with competitive bids. This is likely to drive prices down for the final contracted strike prices. Fixed offshore wind has also been given a separate funding pot in AR6 in recognition of the number of projects ready and eligible to participate[1] in the upcoming round. This will help secure capacity for offshore wind and ensure competition among the projects. Supporting new offshore capacity also helps reduce our dependence on volatile international gas markets, which during the 2022 energy crisis has been estimated by analysts to have cost up to £78.2 billion in energy support to households and businesses[2].

However, ASPs are only one part of the puzzle and we now await more details about the overall budget allocation for AR6. It is important that budget allocation gets the balance right to ensure competition but also to deliver the number and capacity of projects that will put the UK back in a leadership position to achieve net zero and continue to attract jobs and investment to drive economic growth. Specific ringfenced support in the form of a minima budget should be maintained for tidal stream and would also be welcomed for more innovative technologies, including floating offshore wind. A coordinated effort is also needed to remove other barriers to renewable development, including grid connections, planning, skills and future design of the energy market.

Note

The government has also published a new consultation today on how ‘Sustainable Industry Rewards’, formerly non-price factors, could be incorporated into AR7 and beyond. This would mean that projects are reviewed not just on their ability to deliver low-cost renewable energy, but could also receive additional payments based on the project’s social impact, including how supply chains affect jobs and communities.

Regen will be responding to this consultation – get in touch if you have any views on the topic.

Table 1: Administrative Strike Prices per MWh for AR6 – all prices are in 2012 prices

[1] Regen approximates that there are 15 GW of offshore wind projects that could be ready to bid into AR6.

[2] https://www.e3g.org/publications/assessing-the-uk-governments-response-to-the-gas-crisis/