The UK government's Department for Business, Energy & Industrial Strategy (BEIS) has announced onshore wind and solar PV technologies will be allowed to participate in the Contracts for Difference (CfD) scheme to help it move forward on its target of achieving net zero status by 2050.
There are proposals to include floating offshore wind and the government says it will change the scheme to accommodate energy storage as well.
So far, the country has completed three CfD allocation rounds (AR1, AR2 and AR3). It awarded around 16 GW of new renewable energy capacity comprising almost 13 GW of offshore wind. Solar PV and onshore wind weren't allowed to participate in these three auction rounds.
CfD AR4 will be allocated to established technologies in the Pot 1 group and to less established ones in Pot 2. Solar PV projects with greater than 5 MW capacity have made the cut for Pot 1 along with onshore wind, energy from waste with combined heat and power, hydro, coal-to-biomass conversions, landfill gas and sewage gas.
BEIS plans to open AR4 in 2021 with some changes in the CfD scheme itself for which it is seeking consultation from stakeholders.
"Prices have dropped over the last three allocation rounds – offshore wind, remote island wind and ACT projects were all successful in AR3 with clearing prices of around £40 ($51.26)/MWh (in 2012 prices). These prices have reduced faster than expected, demonstrating the important role of the competitive auction process in price discovery," the consultation document reads. "However, we still expect the costs of some Pot 1 technologies, such as onshore wind and solar PV (which also have potentially large pipelines) to be lower than Pot 2 technologies. Whilst prices have reduced for some Pot 2 technologies, there remains potential for further cost reduction and the pace of future cost reductions for some Pot 2 technologies is dependent on levels of UK deployment."
What is CfD?
As per the BEIS website, CfD refers to the price that shows a difference between the strike price (cost of investing in a specific low carbon electricity generating technology), and the reference price (measure of average market price for electricity in the Great Britain (GB) market).
Through its CfD scheme, applicable only in GB and not Northern Ireland, the government supports low-carbon electricity generation in the country. It provides project developers incentives to invest in renewable energy to help them against high upfront costs and volatile wholesale prices. Interested renewable energy generators need to submit their sealed bids to qualify for CfD incentives.
Successful bidders then enter into a private contract with the government entity called Low Carbon Contracts Company (LCCC) for renewable energy produced by their projects to be sold for a fixed tariff over a 15-year period.
Changes proposed in the CfD scheme
With a view to achieving its net zero target by 2050, the government has realized it needs to quadruple its low carbon electricity generation by the same year which will also cater to its future energy demand as ageing plants will need to be decommissioned.
Among the changes proposed by the government for its CfD scheme, it plans to extend the scheme delivery years until March 31, 2030. Installation of 30 GW of offshore wind by 2030 may need to be revised upwards to 40 GW.
Feedback on the consultation document will be accepted till May 22, 2020.
The UK's Solar Trade Association (STA) has extended warm welcome to the government decision to include the two technologies in AR4 round which it claims will cut costs to consumers by £200 million to £300 million ($256 million to $384 million) annually. It believes there is currently a solar pipeline of more than 7 GW of projects in development in the country.
"New clean power auctions for Pot 1 technologies will accelerate the decarbonisation of the power sector and drive the shift towards net zero, bringing with it new jobs, cheaper electricity and opportunities closer to home for Britain's highly experienced solar investors," said STA Chief Executive Chris Hewett.