Opinion: UK government can’t say it wasn’t warned CfD auction would fail

Today (8 September), the fifth contracts for difference (CfD) allocation round in the UK failed to deliver any new offshore wind projects.

The UK's latest CfD auction was a disaster waiting to happen, argues Adam Bell

This represents the almost inevitable culmination of the industry warning the UK government for months that supply chain pressures and higher financing costs had radically changed the outlook for offshore wind. 

A disaster for all concerned

This is a disaster not just for the industry, but for the government’s hopes of meeting its 2030 target for offshore wind deployment and, most importantly, the consumer. 

Delivery of 50GW of offshore wind by 2030 now looks near-impossible without radical changes to the permitting regime, to seabed leasing and how environmental impact assessments are conducted. 

This result also makes achieving the 2030 power decarbonisation target put forward by Labour, the main opposition party to the governing Conservatives – even more challenging. There is a pressing need for Labour to think about what they would need to implement in their first one hundred days – assuming they win the next general election in the UK – to ensure that they could deliver.

Cost to consumers

The pressure to deliver will be significant. Estimates from the Energy & Climate Intelligence Unit (ECIU) see the additional cost to consumers as reaching €1.2 billion (£1 billion) over the coming decade, driven by lost CfD repayments during periods of high gas prices. 

While this estimate may be overblown given that volumes of onshore wind and solar were successful in the auction, the clearing price for onshore of £52.29/MWh (in 2012 prices) indicates that government had considerable scope to increase the offshore price cap while still procuring more energy at a lower price.

This will be set against the backdrop of falling investor confidence in the UK’s offshore wind regime. 

Is the UK’s CfD still fit for purpose? 

The CfD auction was a genuinely world-beating mechanism because it was seen as transparent, predictable, and – importantly – rational. 

It is difficult to regard the government’s decision to not change the offshore price cap as rational, and the suspicion will be that politics came into play. The politics of not being seen to be too green in the wake of the recent Uxbridge by-election  - the ex-prime minister Boris Johnson's former constituency seat, which commentaors argue the Conservatives won due to controversial measures by London's mayor to reduce air pollution - and of not wanting to be seen to subsidise green technology, even though offshore wind at current prices would still be paying back to the consumer. 

Now read: Offshore wind developers avoid renewables tender in 'huge wake-up call' for UK

Government will therefore need to consider what it does to restore confidence in the CfD mechanism. 

A ‘de minimis’ route would be to commit to review their methodology for setting administrative strike prices and introducing new flexibility to modify these closer to the auction in response to world events, as well as accepting a larger budget for subsequent rounds to procure more capacity. 

Radical options

More radical options could include moving offshore wind to a capacity market-style descending clock auction to procure particular volumes of capacity rather than energy, or possibly issuing CfDs to anyone who believes they can construct a project below a particular price. 

However, these are substantive pieces of reform that would take an extended period – which of course we do not have.

Another option for restoring confidence is to remove the CfD auction regime from government entirely and transfer it to the Future System Operator (FSO).

The FSO is a new independent body charged with operating the energy system that will be established following the passage of the Energy Bill, and will fold in the existing Electricity System Operator and the strategic components of the Gas System Operator.

The Electricity System Operator already administers the auction, and there is a strong argument that, when it is folded into the FSO, given its new powers to plan the future system, it will be better placed to judge how much capacity needs to be bought.

However, the FSO, even before it exists, is already being widely recommended as a repository for challenges judged to be too difficult for other bodies, and there is a risk of putting too much onto its plate."

‘Sorry’ is the hardest word

Regardless of what the government does, the correct next step would be a moment of humility to emphasise that it understands it has made a mistake, but this is not a government for which such a thing would come easily.

Adam Bell is head of policy at Stonehaven and former head of energy strategy at the UK government’s Department of Business, Energy and Industrial Strategy (BEIS)