UK Government doubles up on renewables ambition
26 Nov 2020by Former Member
Lumen Energy founding partner Maf Smith* gives his run down of the latest UK Government consultation on the contract for difference scheme
The scheme is the government’s primary method of supporting low-carbon electricity. It encourages investment in renewable energy by providing projects with a stable income, while protecting consumers from paying increased costs when electricity prices are high.
Since auctions began, much has changed. The big picture change is that the government is now relying on renewables as the backbone of the UK power system. Despite lots of positive press about new nuclear, it is clear there is further to travel here for the nuclear sector and it will have to wait until the forthcoming White Paper for a clearer bankable commitment.
Offshore wind is obviously the technology of choice, and the government also wants to see growth in floating offshore wind, and now of course we have a commitment for onshore wind and solar (Pot 1) auctions.
Given all this, it is no wonder that the auction cap has been increased from 6 GW to 12 GW. That extra space will please everybody as it means we can continue acceleration of new renewable power projects.
Here is my run down of the auction and what government decisions mean.
- Onshore Wind. There is now a space for onshore wind (and solar) through a commitment to run a Pot 1 auction. Onshore wind will need to engage on community benefits and is set to publish updated guidance in mid-2021. In doing this, the government will need to work closely with the Scottish and Welsh governments as most projects will be in their territory and competence. They also support CB but expect wrangling behind the scenes. How much onshore wind and solar participates will depend on the auction prices in the draft budget. Expect utilities to want to access the CfD to derisk investments (but with lower returns) while independents start to push out on a merchant basis.
- Pot Structure. As expected, three pots. Pot 1 for established technologies like onshore and solar, a second pot for emerging technologies like floating offshore and tidal stream, and a new third pot for fixed offshore wind. A dedicated third pot means the government can give a sufficient budget that supports ongoing scaling of these projects, while preserving space in second pot to support technologies at different scales.
- Floating offshore wind. As expected, the government is backing floating, with a restatement of 1 GW by 2030. The government has listened and reduced water depth to 45 m. That will hearten anyone looking at WaveHub and Pembrokeshire Demonstration Zone and potentially some ScotWind sites. Government is not proposing allowing phasing for floating wind. Clearly it wants industry to learn to run a short distance before attempting a marathon. That makes sense but if you disagree, you can respond to the consultation.
- Hybrid offshore. The government has taken on board some industry views on the future likelihood of hybrid (fixed and floating) sites. It has not decided what to do but will watch this issue as floating matures to become a lower-cost technology.
- Delivery years. As expected, the government is going to extend the delivery years from 2030 to 2035. This will help keep momentum in the late 2020s and early 3030s and is necessary if we are to deliver 40 GW of offshore, and the 1 GW floating target. If not, delivery would stall.
- Supply chain plans. The government is firm here that it wants to see more action on UK supply chains, and so is consulting on stricter supply chain rules. Expect alignment with the sort of processes being seen in ScotWind (more data and regular reporting). The consultation on this is here. Also included are questions on phasing for floating, potential changes to the BSC and changes due to Brexit.
- Coal to biomass. Not a surprise, good to see that this is being excluded from future CfD rounds. The long-stated aim has been to include it as a transition fuel while other renewables matured. That has happened. And of course, there is not much coal left to convert to biomass.
- Decommissioning. The government has taken on board consultation responses and is not proceeding with linking CfDs to decommissioning ‘at this time.’
- Storage. There are no changes proposals relating to storage. The government asked generic questions about storage, and no clarity has come out of the consultation re colocation, or how to best incentivise. The government will keep a watching brief. That seems about right to me. The best way to stimulate storage is via intelligent network pricing, via Ofgem incentivising DNOs to work as DSOs etc. A Storage CfD would allow double dipping by generators which would distort the market.
- Negative pricing (if you are still with me, I assume you care about this stuff too?). The government is going ahead with proposals to change the CfD so generators bear some negative pricing risk which makes sense. It could also help stimulate storage investment.
- Milestone delivery date (MDD). Currently set at 12 months, it is to be extended to 18 months. That also makes sense. The MDD needs to be longer because offshore projects are getting bigger, and we will have first-generation floating projects. A longer MDD allows developers more time to get projects in full order and main contracts in place so it can reach final investment decision. Bigger projects take longer, plus it needs OEM agreement and they will also be busy talking to a lot of projects.
- Flexibility. The government is going to amend the CfD regulations so it has more flexibility to use caps, maxima and minima to (my words) ‘play tunes’ with the CfD and seek to steer it in different directions. Obviously, the big caveat here is that it depends on the tune as to who decides to dance, but in principle this is important. Rounds 1, 2 and 3 show that in multi-technology pot you get lots of the cheapest technology and not much of anything else. In the Round 1 Pot 1 auction there was lots of onshore, not much solar. In Pot2 there has been lots of offshore wind, not much space for anything else (including remote island wind). In a new Pot2, the government will need to work hard to bring forward different technology.
- Tidal stream. If you are still reading, you deserve a thought on tidal stream. The good news – it is in. The bad news, the government does not talk about the technology much, despite a separate marine energy consultation. The government does say that it will feed this marine consultation response into the White Paper, but compared to floating, the government is clearly fence sitting. It cannot disallow tidal into the CfD, but it remains to be seen if it will create conditions to make a CfD work for tidal. With the Environmental Audit Committee holding an inquiry into tidal power (which I am advising on), that provides a route for this sector to press its case for why it deserves support.
What next? Well, now BEIS is running its consultation on supply chains and phasing (all docs are bundled here). And in early 2021 expect a draft budget with full proposals for Auction Round 4.
So, lots to play for and lots for an industry to do. We need to scale up rapidly and there is lots of opportunity for offshore wind, onshore wind and solar, and now space in the CfD auction for everyone.
If the Government continues to provide this level of support in future auctions, we will see at least 40 GW of new capacity added across the decade.
*Maf Smith has worked in senior leadership roles in the renewable and sustainability sectors for over 20 years and was a founding partner at Lumen Energy, a specialist advisory business helping organisations navigate environmental and energy challenges