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UK CFD auction could deliver 3 GW shortfall – think tank

(Montel) The UK’s latest auction for renewable contracts for difference (CFD) could end with a shortfall of around 3 GW due to the government’s failure to adequately consider rising inflation in the pricing mechanism, a think tank said on Monday.

“Developers were looking for an administrative strike price of around GBP 50/MWh and instead they got GBP 44/MWh,” said Johnny Gowdy, director of UK renewables not-for-profit group Regen. 

“We’re hearing that the [allocation round five] auction could be undersubscribed, mainly for offshore wind but also for floating offshore wind, which would be a big concern,” he said. 

The UK is targeting 50 GW of offshore wind, including 5 GW of floating offshore by 2030, as part of plans to decarbonise the economy. The administrative strike price acts as a ceiling, limiting developers’ ability to recoup construction costs that spiked during the energy crisis last year. 

Assessing bids against individual business cases was difficult, Gowdy said, but he noted recent warnings from developers Denmark’s Orsted and Vattenfall regarding soaring costs of new projects in the UK. 

UK inflation, measured by CPI, surged to a 41-year high in October 2022, at an annual rate above 11%. It has since fallen to 6.8% in July, still more than 4 percentage points above the level seen in the same month in the years 2021, 2020 and 2019.

“Big worry”

Accordig to Faisal Wahid, senior consultant at energy specialist LCP Delta, an undersubscribed auction would give government the opportunity to adjust certain parameters in time for next year’s auction. 

“If the current auction is undersubscribed, the government would have to look at why that happened,” he said. “If we find ourselves in a situation where consecutive auctions aren’t securing enough capacity, then that would be a big worry.” 

Faisal added that the UK remained an attractive location for offshore wind projects, reflected in the success of auctions such as ScotWind and the vast potential for leasing UK seabeds. 

“Fundamentally, the government needs to engage with industry and come up with a better plan that realises actual costs,” Gowdy said. 

The results of the CFD auction are expected on 7-8 September, according to the government’s timeline.