By Dave Elliott
The first full competitive auctions for renewables held under the Contracts for a Difference (CfD) regime led to £315m in contracts being awarded for over 2GW of new capacity in all, with wind projects dominating and some lower than expected strike prices emerging. Two offshore wind farms, Scottish Power’s East Anglia Phase 1, and Mainstream’s Neart na Gaoithe in Scotland, a total of 1162 MW capacity, got strike prices varying between £114.39 and £119.89 per MWh. Despite recent policy shifts, contracts were also awarded to 15 onshore wind farms, across the UK, a total of 748.55 MW capacity, with average strike prices for each year varying between £79.23 per MWh and £82.50 per MWh. Two Energy from Waste/CHP projects also got contracts (95MW total) along with 3 advanced biomass conversion projects (62MW in all), and 5 solar PV projects (72MW in all). Of the total 2.1GW in this round, 1GW are in Scotland. The next round of auctions should be in the autumn, with a still tight overall £325m p.a cash cap. www.gov.uk/government/statistics/contracts-for-difference-cfd-allocation-round-one-outcome and www.gov.uk/government/statistics/cfd-auction-allocation-round-one-a-breakdown-of-the-outcome-by-technology-year-and-clearing-price
The PV projects bid very low and got very low strike prices: two at £50/MWh, almost at convention power cost, the other three at £79/MWh, still lower than the £120 DECC initially specified. It may well be they won’t in the event be able to run at this level- that’s one of the risks of competitive auctions, as was found with the old NFFO support system: many projects bid low but didn’t materialize. In the new CfD round, the wind strike prices were also lower than expected, though much less so: DECCs 2017/18 reference price was £90/MWh for wind onshore and £140 for offshore. Even so progress is clearly being made. www.windpowermonthly.com/article/1335815/uk-awards-first-cfd-round
Indeed, the cost of energy from UK offshore wind farms has fallen by almost 11% over the past three years, ahead of schedule on its path to delivering the UK Government’s target of £100/MWh by 2020, having come down from £136/MWh in 2011 to £121/MWh for projects moving to construction between 2012 and 2014, and now, for the new round, below £120: https://ore.catapult.org.uk/crmf. Further ahead, with the advent of floating devices, they should do even better. An ETI study last year forecast that, with the best technology and sites, they might get as low as £97/MWh, on the way £85/MWh by 2025 and £64/MWh by 2030: www.eti.co.uk/wp-content/uploads/2014/03/PelaStar-LCOE-Paper-21-Jan-2014.pdf
PV and offshore wind were in the so-called ‘Pot 2’ CfD allocation for less developed technologies and were expected to cost more- and they didn’t have to compete in the auction with the more developed and cheaper ‘Pot 1’ projects, like on-land wind and EfW/CHP. The capped CfD allocation was skewed in favour of Pot 2, to help promote the new options- they got £259 m, 82% the £315 m total, despite only providing 1.2GW, 57% of the total. Some market competition orientated groups, like Which and the Policy Exchange, would prefer all the projects to compete on an equal basis: https://greener-cheaper.squarespace.com/blog/2015/2/26/what-can-we-learn-from-the-renewables-cfd-auction-results That would support more capacity at lower cost. Carbon Brief calculated that ‘DECC could have double the renewables capacity it supported for the £315 m allocated, if it had followed this advice and only given money to cheaper renewables, such as onshore wind. Instead of the 2,139MW contracted, it could have secured 5,113 MW of cheapest-only capacity’. http://www.carbonbrief.org/blog/2015/02/uk-renewables-auction-pushes-down-costs/
However, then the newer options would suffer, and on-land wind was not exactly the favourate choice of the conservative part of the government! So we have ended up with a compromise, but still quite low prices. Clearly renewables are getting cheaper… although not all of them fast enough for some. For example, there have been objections to the idea of supporting the proposed Swansea Tidal lagoon with a CfD.
At present tidal barrage/lagoon projects have not been given a specific reference price within the CfD set up, but a strike price of £305/MWh was set for tidal stream projects and there are arrangements for ad hoc support, outside of the existing framework- that’s what the Hinkley nuclear plant got after all. It has been suggested that the Swansea project would be looking for around £168/MWh possibly over 35 years, this time-frame being longer than the 15 years offered to renewables under the CfD, but the same as for Hinkley since, like nuclear plants, the lagoon would have a long operating life, indeed longer than for Hinkley- over 100 years, not just for 60. http://www.tidallagoonswanseabay.com/proposal-overview-and-vision.aspx
Even so, while less than tidal stream, the suggested CFD level is a lot more than offshore wind is now getting (under £120/MWh in the latest CfD round), and there has been an objection from CAB, the Citizens Advice Bureau. In their submission to a DECC consultation on the project, they draw parallels with the Hinkley project, and the non-transparent way they claim its funding was arranged: ‘the process being used to assess Swansea Bay has significant weaknesses.’ They conclude ‘Given the huge cost and lack of countervailing benefits of the project, the outcome of the process should be to reject the application unless there is significant change from the prices and benefits currently in the public domain’. www.citizensadvice.org.uk/index/policy/policy_publications/er_fuel_water_post_digital_telecoms/cr_fuel_water_post_digital_telecoms/swansea-bay-lagoon-consutation.htm
The Swansea project developers have claimed that, after the ‘First of a Kind’ (FOAK) project, costs for the subsequent schemes it has in mind would fall – to around £92/MWh for the next two, similar to what Hinkley will get, if built, or even lower: http://www.bbc.co.uk/news/science-environment-31682529 But CAB claims that any such reduction would not be due to technology learning, but was simply due to them being larger more cost effective sites. And ‘putting aside the speculative nature of these cost reductions,even if it were guaranteed that they could be achieved, the best possible case put forward is that at some point in the future they could reach a cost level that can already be matched or beaten by other technology choices’, while ‘those competitor technologies will likely see their costs degress further’.
So, as with Hinkley, they see a risk of consumers being stuck with expensive CfD payouts for a long period ahead, while other options get cheaper. And CAB are also unconvinced by the claim that there would be compensating social benefits, which it says in any case would be hard to quantify. Focusing on a strict cost benefit approach, and given the limited cash available under the Levy Control Framework for low carbon project, they say: ‘It is imperative for consumer well-being that DECC foster competition between low carbon technologies and that it concentrates its efforts on bringing forward the most cost-effective projects’. And they conclude ‘we would consider it wholly unacceptable if considerably lower cost projects in alternative technologies that are subject to genuine competition found themselves frozen out as a result of determination to bring forward this project.’
On this view is what is being said, to put it crudely, FOAK Off? How do novel First of a Kind projects ever get a chance? CAB say ‘we recognise the desire to take calculated gambles on immature technologies to see what can be learnt [..] But we are acutely uncomfortable with DECC making these gambles through bill levy funding [..] We note that funding has been made available for carbon capture and storage demonstration projects through taxation and EU funding, rather than UK bill levies’. Ah, so tap taxpayers instead!
Actually though that is a little unfair- taxpayers and consumers are not the only source of funding for new ventures. In reality, as a recent survey of UK wave and tidal stream project development companies found, they had attracted around £7 of privately sourced money for each £1 of public funding received. And the Swansea lagoon project developers have now got promises of £100m in investment support from both the Prudential and from Infrared Capital. But they would need the CfD to make it bankable. www.clickgreen.org.uk/news/national-news/125647-study-calls-for-new-funding-approach-for-uks-marine-energy-sector.html
The CfD may not be the best way to support innovative technology and FOAK projects, but given private capital’s evidently increasing aversion to risk, we do need to find ways to support them. I will be looking at innovation in my next post.