CfD reform - Strike prices continue to go down

In this blog, Leigh Brown, Senior Business Development Manager at SmartestEnergy, discusses the current Contracts for Difference (CfD) concerns facing the industry and shares the importance of reform to recognise broader non-price benefits.

RenewableUK, Energy UK, and Scottish Renewables have teamed up to write a letter urging the UK Government to restore the yearly clean power auctions. In the joint communication, these trade bodies have proposed several suggestions aimed at reducing energy costs by promoting greater private investment in renewable technologies. The current CfD strike prices are no longer reflective of costs, leading to a decline in the industry's ability to invest in crucial infrastructure and the domestic supply chain.

The existing Contracts for Difference (CfD) scheme has achieved significant success in reducing renewable generation costs, however, it has failed to recognise important elements such as supply chain growth and innovative technology adoption. This puts the UK at risk of missing out on substantial system advantages. The combination of declining strike prices and increasing commodity costs is creating significant pressure on the supply chain, delaying further development in the sector.

In the past, the CfD has faced criticism due to the lack of support for assets such as energy storage that play crucial roles in the flexibility of the energy system. Energy storage systems are essential for maintaining a reliable energy supply, and by not encouraging these projects, the CfD is holding back on transitioning to a more decarbonised energy grid.

The UK government is currently seeking opinions on potential reforms to the CfD scheme and is looking to support applicants to incorporate broader benefits that their projects could offer, for example, additional advantages of their low-carbon electricity projects when submitting price bids to the government. These proposed reforms would encourage applicants to take into account both overall costs and other essential "non-price factors" when submitting their bids. These other important factors include supply chain sustainability, addressing skills gaps, fostering innovation, and enhancing system and grid flexibility and operability.

There are also suggestions to allocate a separate budget for fixed-foundation offshore wind to enhance deployment. Technologies like floating wind and tidal stream projects, fostering cost reductions, and developing robust supply chains have also been put forward.

The UK is forecast to have the slowest growth in low-carbon generation of the world's eight largest economies between now and 2030, with currently only 0.9kW renewable capacity per capita, compared to Germany and France, with 1.8kW. The trade associations have asked for a re-evaluation of how the value of CfDs is determined to align with the UK's net zero targets, and the government is already working closely with industry working groups to figure out the best way forward, recently announcing a significant funding boost of £22 million!

So far, CfDs have played a vital role in contributing to the development of renewable capacity, but further investment is necessary to meet the UK's 2050 net zero goal, and CfD reform will bring us one step closer.