The UK government has increased the maximum price that offshore wind projects can receive for selling their energy and opened a consultation into a new incentive scheme for developers.
The boost in price comes after the fifth round of the Contracts for Difference (CfD) scheme received zero bids from offshore wind developers. This failure has set back the UK’s progress on renewables; if the fifth round had been successful, it would have delivered around 5GW in offshore wind capacity. The failure of Allocation Round 5 also means that the taxpayer will spend roughly £2 billion a year more on power in the coming years, because of the need to supplement the missing wind power with more costly gas.
66% increase in CfD strike price
For next year’s CfD round, the government has hiked the maximum price available for offshore wind by 66%. The strike price is going from £44/MWh to £73/MWh. For floating onshore wind projects the price is going from £116/MWh to £175/MWh, an increase of 52%.
The next CfD round will also see a separate funding pot allocated specifically for offshore wind “in recognition of the high number of projects ready to participate” – a tacit acknowledgement that the missed opportunity of Allocation Round 5 will have created a backlog of viable projects.
The maximum bid prices for other renewable technologies are also increasing for Allocation Round 6. This includes geothermal (a 32% increase), solar (30%) and tidal (29%).
Rewards for sustainable generation projects
But price is not the only incentive the government is shaking up. It has already consulted on the possibility of changing the CfD criteria so that price is not the only factor. Last week it announced a consultation on a scheme it is proposing to introduce, known as the Sustainable Industry Reward (SIR). The consultation opened on 16 November, the same day as the announcement about the boost in CfD strike prices.
The Sustainable Industry Reward would consider different types of sustainability for a renewables project, such as financial and social sustainability as well as environmental. Assessment under the scheme would consider factors such as:
- what benefits a new renewables project could deliver to local communities
- the resilience of the developer’s supply chain
- how a potential new renewables project affects the environment
If implemented, it would come into force for Allocation Round 7, so presumably from 2025 onwards. It would only apply to offshore wind and floating offshore wind projects, “due to their unique scale, and the unsustainable nature of the conditions facing the sectors recently”.
Industry-led reward mechanism
Under the model currently being proposed, the SIR would be a reward mechanism providing an “uplift” to a successful applicant’s contract.
The SIR is being described as “industry-led” because the government would not set the level of the reward. Instead, developers of potential generation projects would themselves have to calculate what level of reward they merit, based on the cost of delivering the non-price factors such as benefiting local communities. Then they would include that information in their CfD bid. The thinking is that because developers are bidding against each other, proposals would remain competitively priced and deliver value for the taxpayer.
The reward payment would not affect the actual strike price paid through Contracts for Difference because it would be additional. The current proposal is to pay the SIR when developers deliver on the commitments made in their application. The full details of how the SIR mechanism will work will not be decided until after the consultation closes in January 2024. But the direction of travel is clear: government has set the intention to encourage new offshore wind through the creation of stronger incentives.
