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Offshore wind leaders warn CfD changes may be needed as UK sector grows

Auction mechanisms that have worked well in the past might not be fit for the future, according to offshore wind leaders

Offshore wind leaders discuss the future of the sector at RenewableUK's event in London (pic credit: SSE Renewables)
Offshore wind leaders discuss the future of the sector at RenewableUK's event in London (pic credit: SSE Renewables)

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Senior figures from wind turbine manufacturers questioned whether the UK’s contract for difference (CfD) auction mechanism is fit for purpose on the opening day of a global offshore wind conference in London.

The CfD mechanism sees developers compete for 15-year government contracts, through which they receive a fixed price for output from their energy projects. Operators receive the wholesale market price and an additional fee if this is below the stipulated price, or, if the market price is above this stipulated price, they reimburse the government.

Panellists at RenewableUK’s Global Offshore Wind conference held in London, England, described the mechanism as being successful in helping to launch the UK’s world-leading offshore wind sector.

This success has led to it being replicated in other markets, and industry bodies calling for a similar mechanism to be introduced elsewhere due to its ability to drive competition but also provide stable revenue streams to developers.

But panellists in the opening global offshore wind vision session debated whether it would be fit for purpose as cost reductions stabilise and as the sector moves towards higher targets.

Clark MacFarlane, UK managing director at turbine manufacturer Siemens Gamesa Renewable Energy, said: “I think the auction system before was great in terms of kicking off the industry, but I would scrap it.

“If we are really going to go for 2050 and get to 450GW in Europe (the figure industry body WindEurope believes the continent will need to help reach carbon-neutrality by mid-century), relying on such a mechanism probably doesn’t work.

“If we can get to an affordable price, we should let it build and let the market run. I don’t think this competitive process is good for long-term growth.”

While not calling for the CfD mechanism to be scrapped, other panellists suggested changes might be needed as renewables achieve higher penetration on the grid – and so play a greater role in impacting wholesale prices – and given that offshore wind farms’ life expectancies are increasing.

Sven Utermöhlen, CEO of offshore wind at developer RWE Renewables, said: “We need to think about auction design for offshore wind farms, but also the much wider question of the electricity and energy market design. We need to think about in ten or 20 years’ time, when we have 75% renewable energy, how would electricity prices be established in the first place, and how do we do that to incentivise new investment? 

“At some point, the short-term margin costs are zero. If that is the case, nobody will invest in new plants. We need a price that reflects the low cost of renewables, but also incentivises investment in new plants.”

Utermöhlen also cautioned: “Some markets have changed their mechanism and that has led to a hiatus and that is the last thing we need in the UK to reach our goals.”

Jim Smith, managing director at utility SSE Renewables, agreed that discussions about the future of the CfD and offshore wind auctioning – whether for leases or offtake agreement – would need to take place.

“With higher renewables penetration, the current market design probably does not work,” Smith said.

“We need to start thinking about how the electricity market now works past 2030. I think over the next decade there will be more discussions about how it needs to change.”

He added: “These are 30-year assets and the CfD is only 15 years, and the second 15 years is just as important – if not more – than the first.”

Meanwhile, Duncan Clark, Ørsted’s UK head noted that the question of who gets access to the grid will still need to be addressed.

And Morten Buchgreitz, global senior vice president of global offshore commercial at turbine maker Vestas, said: “I think the CfD mechanism has worked very well. We will need something like that going forward to make sure that we have a fixed revenue stream to attract cheap capital and be able to invest in new capacity.”

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