Second CfD auction results in lower Strike Price

Second CfD auction results in lower Strike Price

The results for the second Contracts for Difference (CfD) auction have been released. With up to £290m of government contracts up for grabs, competition between green energy developers was fierce. Offshore wind has dominated.

As expected, the price has fallen from the first CfD auction carried out in 2015. The guaranteed price on offer to developers – the so-called ‘Strike Price’ – dropped to 74.75/MWh for offshore wind being delivered in 2021, and £57.50/MWh for wind projects operating from 2022.

Uncertainty over the timescales for future auctions added to the competition for the auction, helping to push the Strike Price lower as developers rushed to ensure they had some form of support. Projects already under development will have been keen to secure available subsidies now rather than risk nothing at a future date.

The auction, which welcomed sealed bids between 14-18 August, was open to any ‘less-established’ renewable technology projects. This meant onshore wind and solar projects, which were allowed to enter the previous auction, were not eligible to seek CfD support this time. Projects are also required to be operational between 2021 and 2023.

Offshore wind capacity dominates auctions

In the latest auction, offshore wind dominated the winning bids, following significant cost reductions in the technology over the last two years. Overall, winning projects have committed to 3.3GW of generating capacity, of which offshore wind accounts for 97% and the largest project of 1.4GW, the Hornsea 2 scheme.

CfDs awarded in the UK as part of the first auction reached as high as £120/MWh. An earlier award of support, the Final Investment Decision Enabling for Renewables (FiDER), was conducted without an auction and guaranteed prices of up to £150/MWh. The planned Hinkley nuclear plant is part of the FiDER project, and will receive support when it starts generating.

Similar auctions in the Netherlands and Denmark have seen the auction prices for offshore wind drop to record lows, while Dong Energy and EnBW are to construct wind farms off the coast of Germany with no subsidy at all.

CfDs explained

CfDs were introduced as part of the Government’s Energy Market Reform (EMR) package, largely to replace the Renewables Obligation (RO) which closed this year. The Strike Price awarded represents a guaranteed return the generator will receive. The cost of this support is passed to consumers via a levy on their final bills, which will represent the cost difference between the wholesale and Strike Prices. As such, while the net revenue from the scheme to generators will remain stable, the cost to consumers will vary depending on the prevailing wholesale price.

What is the impact to your bills?

The last set of auctions and the FIDER are estimated to have increased bills by over £2/MWh in the last year, a cost which is expected to rise to nearly £7/MWh before the end of this decade as more supported plant comes on-line.

The results of the latest auction could contribute to at least a further £1.50/MWh gain at, when the new capacity starts to become available.

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Ross Moffat

Posted by on Monday, the 11. September at 11.13

Ross Moffat has been a part of the Market Intelligence team at Utilitywise since early 2014. His responsibilities include delivering Market Intelligence reports to clients and managing the Utility Insights Twitter account. Ross has a first class Honours degree in Business and Marketing from the University of Stirling.