Budget announced for first annual contracts for difference auction round, but renewables industry fears smaller funding pot and soaring material costs could hit project pipeline
Just hours after the government faced criticism for failing to include any new measures to support the UK's renewables industry in its Spring Budget, the government has today announced a £205m budget for the next round of clean energy auctions that are due to take place later this year.
The Department for Energy Security and Net Zero today confirmed the next contracts for difference (CfD) auction round will be backed by £205m, including £170m for established technologies such as offshore wind and £10m that will be ring-fenced for earlier stage tidal stream technologies.
The funding will be made available through the fifth CfD auction round, which will also be the first auction to take place annually, after the government last year moved to accelerate the timetable for contract awards in response to growing fears the UK was off track to meet its clean energy and climate goals for this decade.
CfDs provide clean energy generators with guaranteed prices for the power they generate, with the government offering a subsidy payment if wholesale prices drop below the agreed strike price, but receiving payments from the generator if wholesale prices move above strike prices. In recent years, the regime has delivered savings for billpayers, as wholesale power prices have risen on the back of high fossil gas prices and renewables costs have fallen sharply.
To date the approach has provided contracts to nearly 27GW of low carbon capacity, including almost 11GW from the last auction round alone.
"Our flagship Contracts for Difference scheme is already delivering clean, homegrown energy as well as growing a green economy with green jobs," said Minister of State for Energy Security and Net Zero Graham Stuart.
"Today's budget announcement, the move to annual auctions and continued investment in renewable energy will limit the impact of events like Putin's illegal war in Ukraine and drive our overriding priority for the UK to have amongst the cheapest wholesale electricity prices in Europe.
"I am excited to see the opportunities that will open for Britain's world-class renewable industries as annual auctions kick off this year, enhancing the UK's reputation as among the most attractive places to invest in for a secure, affordable and prosperous future."
Neil McDermott, CEO of the Low Carbon Contracts Company (LCCC), which manages the award of CfDs, welcomed the announcement. "We look forward to working with investors and generators for these important projects as we continue the journey to Net Zero," he said.
The budget confirmation is likely to be welcomed by renewables developers, but there is also some initial concern at the scale of the funding on offer.
Last year's auction round had a higher budget of £285m and the government is yet to publish the reference prices for the upcoming auction, meaning it is difficult to calculate how much capacity the this year's auction will support.
There are also widespread concerns across the industry that following years of falling renewable energy costs, soaring raw material prices over the past year mean developers could struggle to put forward bids in the next auction that undercut last year's round. As a result there are fears within the industry that the pipeline of new projects secured through the next auction round could be smaller than previously expected.
Michael Chesser, economics and markets manager at trade body RenewableUK, warned that "in the light of global inflationary pressures, the budget and parameters set for this year's CfD auction are currently too low and too tight to unlock all the potential investment in wind, solar and tidal stream projects which the industry could deliver".
"Concerns about energy bills and energy security are at a record high, so the UK should be trying to maximise investment in low cost clean energy, to provide relief for billpayers who've been hit hard by massive spikes in global gas prices over the past year," he said. "At a time when the US and EU are bending over backwards to offer incentives for renewable energy developers to come to them to build new projects, the UK is sending the wrong investment signals. As a result, we risk losing vital opportunities to scale up our supply chains around the UK, denying communities the industrial-scale benefits which our sector offers. We're also jeopardising our global lead in cutting-edge clean energy technologies like floating wind and tidal stream."
He added that RenewableUK was now calling on the government to revise the CfD budget "so that we can stay on track to deliver on our renewable energy targets, as well as creating tens of thousands of high-quality green tech jobs and attracting billions in private investment in the years ahead".
The announcement comes just a day after Chancellor Jeremy Hunt confirmed £20bn of funding is to be made available over 20 years to support new carbon capture projects and unveiled plans for a new competition to deliver the UK's first small modular reactor.
