On 2 March 2020, the UK Government issued a consultation on proposed changes to its highly successful contracts for difference (CfD) regime that supports renewable electricity generation. The CfD regime has been central to the success of the UK’s offshore wind industry and will remain so, but needs to evolve
Close scrutiny suggests that apart from opening opportunities for floating wind projects, the proposals might see offshore wind projects compete against one another in future – not just against other technology. Developers might be penalised for failing to meet supply chain commitments, and they will need to pay much closer attention to decommissioning costs in future.
Initially, the item that attracted most attention in the consultation was that onshore wind and solar will be allowed to apply for CfDs again in 2021, but as Adam Brown, a lawyer focused on the energy sector and net zero at law firm Dentons explained, the consultation could lead to a many other changes for the offshore wind industry.
As of June 2019, the UK has a target of net zero emissions by 2050. And before then, the government wants to achieve 40 GW of offshore wind capacity by 2030.
The most recent CfD auction saw just under 5.5 GW of offshore capacity awarded CfDs for delivery between 2023 and 2025. But assuming that this is all delivered, can such levels of activity be sustained? Even if they are, with auctions occurring every two years and projects bidding to deliver in five or six years’ time, it is not certain that the 2030 target can be reached, Mr Brown believes.
Although the costs of offshore projects have fallen significantly, and it has become feasible to build them much further from the shore than was once the case, there are concerns about whether it will be possible to fulfil the high ambitions for 2030 while relying entirely on monopile, jacket or suction bucket foundations into which the turbine tower is built.
“As the industry grows and occupies more of the available areas of shallower water, the cumulative impact of each new project – such as seabird mortality – increases, potentially posing more problems under nature conservation legislation,” Mr Brown noted, highlighting that The Crown Estate recently announced a plan-level Habitats Regulations Assessment of Round 4 leasing round of sites for offshore wind development, with a view to addressing these issues.
The government now recognises the need to stimulate more rapid adoption of floating offshore wind technology, not least because it will become possible to locate turbines over a wider area. This would reduce cumulative adverse environmental impacts and increase security of supply, reducing the risk of loss of generation.
The consultation document also suggests that floating turbines could provide clean electricity for offshore oil and gas infrastructure. Moreover, with an eye to export markets, at a global level, the technology will become much more useful in markets.
“Floating wind can of course already apply for a CfD, but in its current state of development, the technology is unlikely to win against fixed bottom and the other technologies that it would compete against in the ‘Pot 2’ category,” Mr Brown explained.
At present, the CfD regulations do not recognise floating offshore wind as a separate technology, but the government proposes to change that, by introducing a new concept of a ‘floating offshore wind CfD Unit’ – defined as consisting entirely of floating turbines. It would then be possible in future auctions to set a framework that effectively reserved part of the budget to such units, or at least ensured they were not in direct competition with low-cost fixed bottom developments.
Mr Brown said the government proposes to retain the current 1.15 GW cap on phased offshore wind projects, ‘to strike a balance between economies of scale and facilitating new entrants to the market.’ But a final notable proposal in relation to offshore wind is that in future auctions, offshore wind projects might only compete against each other, rather than – as previously – against other ‘Pot 2’ technologies such as advanced conversion technologies, or against ‘Pot 1’ technologies like onshore wind and solar.
“While it is arguable that offshore wind no longer fits the ‘less established’ designation of Pot 2, the very large scale of the fixed bottom projects now coming forward does make it somewhat mismatched with other technologies,” said Mr Brown.
“As the consultation document notes, such a restructuring of the pots would require regulatory approval, but there is plenty of precedent for mechanisms designed to offer support specifically to offshore wind projects being approved under the EU state aid rules, and there is unlikely to be any lack of competition for CfDs in an offshore-wind only category.”
As he also noted, a key element for CfD projects with a capacity of more than 300 MW has been the requirement to submit a ‘supply chain plan’ as part of the application process. The intention has been to ensure the development of the renewables industry – and the offshore wind sector in particular – delivers some benefit to the UK industrial base.
The consultation notes that ministers ‘can take account of an applicant’s failure to implement a supply chain plan when considering subsequent applications.’ Potentially, all partners with a 20% or greater share in a project can find themselves excluded from an allocation round as a result.
It further notes that the government wants to ensure the regime contributes to the Grand Challenges of its Industrial Policy and ‘advances the low carbon economy in places which stand to benefit the most by boosting productivity, driving regional growth.’ “It is therefore asking how it could strengthen the supply chain policy so as to ensure it remains ‘fit for purpose,’” Mr Brown said.
Another thing that has changed over the last five years is the extent to which increasing amounts of intermittent renewable capacity is driving – and is, in the future, expected to drive – negative pricing in wholesale electricity markets. In 2015, the government thought this might happen 0.5% of the time in 2035. With 30 GW or more of offshore wind, it now thinks it could happen 4.5% of the time.
As part of its clearance of the CfD regime under the state aid rules, the European Commission required that support should be capped at the level of the strike price in periods of negative pricing, and that if these persist for six hours or more, ‘the difference amount under the CfD contract will be set to zero for the entirety of that period.’
As result, the government would now like to remove any incentive on CfD generators to generate when there is oversupply in the market, and proposes to extend the existing negative pricing rule so that difference payments are not paid to CfD generators when the Intermittent Market Reference Price is negative.
“What is arguably missing from the consultation are incentives for the development of much larger scale facilities that could be capable of absorbing, for example, a significant proportion of several windy nights’ worth of offshore wind generation, for which there is no immediate demand,” Mr Brown noted.
“Also useful, perhaps, would be incentives to develop commercial-scale electrolysis facilities into which surplus power could be diverted for conversion into green hydrogen that could be substituted for hydrocarbons in power, heat or transport applications. “But whether the CfD regime would be a suitable vehicle for such incentives – and, if so, how it would need to be adapted to provide them – is another question.”
Last but by no means least, given the rapid ramp up in the number of offshore wind turbines in the UK, the cost of decommissioning them one day needs closer attention.
Decommissioning costs for those in operation or construction in 2017 alone has been estimated at £1.28-£3.64Bn in 2017 prices. Against this background the government wants ‘to ensure developers give appropriate consideration to decommissioning during the development stage,’ so as to minimise the risk to taxpayers of the government having to act as ‘decommissioner of last resort’ and it is considering whether it would be appropriate to include specific decommissioning obligations in the CfD regime.