- Renewable Energy
- Project Financing
- Offshore Wind
- Onshore Wind
The Impact of CfD Allocation Round 5 on the Corporate PPA Market—and What the UK Government Has Done to Ensure a Better Outcome for Allocation Round 6
Coauthored by Curtis McNeice
The absence of any offshore wind projects in the results of the Contract for Difference (CfD) auction earlier this year jeopardizes the UK government’s net-zero targets and challenges the achievement of its offshore wind goal of 50 GW by 2030. At the same time, the UK corporate power purchase agreement (CPPA) market has been negatively affected, highlighting the critical role of policymakers in promoting both government CfDs and CPPAs.
For the next allocation round, an increase to CfD strike prices and a structural change to the funding pots system aim to give developers assurance on the future of renewable energy deployments currently facing the growing cost of capital.
What Is the CfD Support Scheme?
In 2014, the UK government established the CfD scheme to support the country’s transition to renewable energy. The scheme is designed to provide developers with project revenue stream predictability—compared with the volatility seen in wholesale markets—enabling them to finance renewable energy projects at competitive interest rates.
Under a CfD structure, the developer contracts with the government-owned Low Carbon Contracts Company (LCCC) at an agreed rate—the strike price—for the electricity produced over a 15-year period. If the strike price is higher than the reference wholesale market price, LCCC pays the developer the difference, thus offering protection from any financial losses. If the strike price is lower than the reference market price, the developer pays LCCC the difference, which has a stabilizing effect on cash flows.
What Happened in the Fifth Allocation Round?
Since 2014, the CfD scheme has facilitated more than 29 GW of renewable energy investments, boosting the development of a range of different renewable technologies including onshore and offshore wind and solar PV. The auction rounds have been a success in recent years: during Allocation Round 4 (AR4) in 2022, almost 10.8 GW of projects secured financing, including 7 GW of offshore wind, 0.9 GW of onshore wind, and 2.2 GW of solar PV.
The outcome this year was different. In September 2023, the UK government announced that Allocation Round 5 (AR5) secured only 3.7 GW of renewable capacity, a 65% drop from the previous year. A key reason for the decrease is that AR5 failed to procure any offshore wind, due to the administrative strike price (ASP)—the maximum clearing price in an auction that developers can receive for a specific technology—being set too low. Many developers elected not to submit bids, citing risks to project profitability. Many believe that the disappointing result was driven by a failure of the auction to accurately capture the economic impacts of high inflation and rising interest rates.
What Were the Consequences?
When AR5 failed to secure any offshore projects, the spare budget was split between other technologies (mostly onshore wind and solar PV). Onshore wind projects received a particular benefit, with 24 projects secured totaling nearly 1.5 GW of capacity—an increase of 14 projects and 0.6 GW from AR4.
Despite the positive outcome for onshore wind, the CPPA market may be negatively affected by the CfD results. Corporate buyers may experience a reduced volume of projects available in the market, as more onshore wind projects than expected were successful during AR5 and saw the CfD win as an appealing alternative to CPPAs to secure financing, negotiate project terms, and reach final investment decision. Lower supply, combined with strong demand, may continue to place upward pressure on CPPA prices.
What Changes Have Been Made to Address These Issues?
In the recently published plans for Allocation Round 6, the UK government has made key updates to address identified issues from AR5, accounting for changes in market dynamics. These updates include:
- Increasing the ASP by 66% up to £73/MWh for fixed-bottom offshore wind projects and by 52% up to £176/MWh for floating wind projects.
- Introducing a dedicated funding pot for offshore wind in recognition of the strong project pipeline in the country.
What Can We Conclude?
- The results of AR5 jeopardized the accomplishment of national renewable energy targets and corporate decarbonization goals by reducing the availability of new CPPAs.
- The UK CfD auction plays a critical role in the achievement of national net-zero plans and therefore needs to better account for market dynamics to enable the success of future allocation rounds.
- The recent plans for the next CfD round bring back hopes for national offshore wind installed capacity goals and show that policymakers are committed to learning from the outcomes of AR5.
- The amendments made to the allocation framework provide assurance that CPPAs and the CfD auction process can coexist into the future.