The UK Government and industry leaders are under pressure to reform the key pricing mechanism for electricity generated by offshore wind farms following the failure of the latest Contracts for Difference (CfDs) auction round.
CfDs were a big success following their phased introduction in 2014 with the aim of encouraging investment in offshore wind to produce clean, green electricity. In contrast to the previous renewable obligations certificates (ROCs) system, generators received a fixed, pre-agreed price per megawatt hour (MWh) for producing low-carbon electricity for the time their contracts ran, protecting them from market fluctuations.
At the time of writing the UK has the potential to produce about 45% of the nation’s daily electricity requirement through wind power, and in 2022 nearly a third of our electricity was generated through wind turbines.
Additionally, the cost of offshore wind energy has fallen by 67% since 2017, due largely to CfDs creating a more competitive market with generators bidding for the lowest CfD price in order to win the ‘low-carbon contract’. Therefore, the positive impact CfDs have had on the development of the nation’s renewable energy assets was evident up until September this year.
no new offshore wind development contracts were agreed in this year’s fifth round of CfDs, creating a problem for a Government committed to producing 50GW of offshore wind by 2030 compared to less than 14 gigawatts at present.
As an island nation, we’ve lately discovered the impact that any major world events can have on our delicate energy supply chain. With continuing uncertainty and fluctuations in both the cost of wholesale energy for suppliers and the day-today costs for business and individual consumers, the argument for energy market reform is perhaps greater now than ever before.
Prior to the recent auction, the strike price for the next round of CfD bidding was expected to remain the same or perhaps increase, contrary to historical CfD auctions. However, recent inflationary rises were flagged by industry leaders as making offshore wind farms economically unviable going forward, even with CfD subsidy.
Wind power remains cheaper than other technologies, while creating and maintaining skilled jobs and inward investment. The CfD scheme has been a success, but this year’s events show a clear need for changes to the framework to ensure the UK can enhance its energy security while controlling costs in order to remain competitive globally.
Our experienced energy team at Galbraith would be delighted to answer any questions you may have or offer advice with negotiations between energy suppliers and landowners giving up land for infrastructure development whether wind, hydro, battery storage or solar.
Read more from our experts in Energy Matters Summer 2023
Energy Matters Winter 2023 is on its way, where the above article appears.