A leading energy analyst expects the newly launched contract for difference auction in the UK to result in a significant amount of new offshore wind capacity
Leading energy analyst Aurora Energy Research says it expects the newly-launched contract for difference (CfD) auction in the UK to result in a significant amount of new offshore wind capacity, but that the contracts are not likely to be subsidy-free.
The auction round was formally launched on 29 May 2019 with an 18 June deadline for developers to submit bids. The results of the auction could be announced in November 2019.
Aurora Energy Research project leader project leader Weijie Mak told OWJ, “We expect the ongoing contract for difference Round 3 auction to secure approximately 3 GW of offshore wind capacity.
“This is similar to last year’s procurement despite having a subsidy pot that is only a third its total expenditure, and attests to the rapid technological improvements in the offshore wind sector, where developers are expecting to realise higher load factors at lower cost.”
However, Mr Mak and his colleagues believe that the clearing price in the auction will probably be higher than that required for it to be characterised as ‘subsidy-free’ deployment.
“As price cannibalisation increases with additional wind deployment, Aurora forecasts that assets would need to secure contracts in the range of £47-£49/MWh (US$59-62/MWh, 2012 prices) for subsidy-free deployment to happen,” Mr Mak said.
“This could prove challenging for the average offshore wind asset, although specific assets that enjoy more favourable economics – such as higher load factors, such as those in the North Sea – might be able to achieve this.”
This is in contrast to reference prices published by the Department of Business, Energy & Industrial Strategy (BEIS), where a subsidy-free deployment would occur with contracts in the range of £51-52/MWh (US$64-66/MWh, 2012 prices).
Another leading consultant, Cornwall Insight, told OWJ recently that it expects up to 3.2 GW of offshore wind capacity could be awarded in the CfD auction.
As previously highlighted by OWJ, BEIS announced that participants in the auction would be competing for an annual budget of £60M (US$80M), with successful bidders expected to commission in 2023-24 and 2024-25.
Cornwall Insight said its initial analysis suggested that 1.9-3.2 GW of offshore wind capacity could be procured in the auction at the administrative strike price levels set by BEIS of £56/MWh (US$74/MWh) 2023-24 and £53 MWh (US$70/MWh) 2024-25.
As also highlighted by OWJ, it has been suggested that the much-anticipated CfD auction could result in offshore wind that costs the government just £2/MWh (US$2.6/MWh).
Disappointment about the seemingly small sum allocated to the CfD has been tempered by analysis of how much capacity £60M might actually buy as costs continue to fall.
The £60M (US$76M) was lower than anticipated by many in the wind energy sector given the overall level of funding announced by the government for future CfD auctions (£557M) and caused questions to be asked about how much capacity that might buy.
However, as a BEIS spokesperson told OWJ at the time, “the fall in the cost of renewable electricity means that we should be able to secure more generation than the last auction at a lower cost for consumers.”
Cornwall Insight said BEIS has been looking at other European auctions, that have cleared €40/50 (US$46-57) per megawatt hour and believes there is still more cost reduction that can be achieved in the UK.
“BEIS believes that by rationing the amount made available for the auctions, it can secure bids that are as competitive as possible. It has updated its administered strike prices and looked at what it expects the wholesale price to be in the future. The thinking is that prices in the UK can come down further and that parties bidding in the auction will be prepared to bid lower.”