2022 is set to hold what could be the largest Contracts for Difference (CfD) auction to date, Allocation Round (AR) 4, with government aiming to secure around 12GW of new renewables through the scheme. It will see the re-introduction of Pot 1 technologies (“established” technologies such as onshore wind and solar) for the first time since 2015, the ringfencing of some budget for both floating offshore wind and tidal stream technologies, and offshore wind competing as a separate pot (Pot 3) in its own right. Overall, up to £285mn (of committed annual spend) is available to support renewables competing in AR4.
Entering the competition – I thought I was in?
Where are we now regarding CfD AR4? Right now, we are nearing the end of the CfD Allocation Application Window, which runs from 13th December 2021 – 14th January 2022. Hopefully, a festive application window didn’t affect any applicants from having a relaxing Christmas break, but there may have been instances of double-checking eligibility requirements with a mince pie in hand. Some of the key eligibility requirements for sites include a confirmed grid connection, as well as planning permission being granted, and all paperwork needs to be in order. And as a certain well-known tennis player has learnt recently, entering major competitions isn’t straightforward if the paperwork and eligibility requirements are not met.
Where next? From 17 January until 25 February is the Qualification Assessment Window, where the Delivery Body (National Grid ESO) reviews CfD applications against the relevant Qualification criteria. After this, the potential timelines of the auction can vary significantly, largely depending on requests from non-qualifying applicants for a review of their applications and any subsequent appeals to Ofgem. Will National Grid ESO and Ofgem be as willing to overturn decisions as the Australian judicial system when it comes to tennis competition entry?
Assessing the competition – can I really win this thing?
As CfD applicants enter the auction, assessing competition levels will be high on the agenda. It will impact developers’ views on the likelihood of winning a contract, and could even affect how some assets price themselves in the auction. And remember, renewables only compete with other assets within their own technology pots, subject to some minima and maxima that have been set for several technologies.
With a 5GW capacity cap, it’s no secret that Pot 1 is set to be a competitive auction. It’s the first time these assets will have had access to a government CFD auction since 2015 and in the absence of adequate alternative routes to market (at least on a large scale), a reasonably large pipeline has built up in the planning framework. Our Renewables Pipeline Tracker service shows that there is grand total of ~25GW of Pot 1 technologies in the pipeline, and if we include additional sites identified in the DNO Embedded Capacity Registers, this number is even higher. However, a large proportion of this is unlikely to be able to compete at this stage, as many will not have secured both planning consent and grid connection agreements. That being said, our tracking of the renewables pipeline has shown a rise in the number of sites, most notably solar PV but also onshore wind, securing planning permission recently with developers positioning themselves for the auction. Due to both the Levelised Cost of Energy of Pot 1 technologies, and what’s simply in the pipeline, both solar PV and onshore wind assets are set to be the most competitive bidders in the auction.
The Pot 2 auction will see a slightly different set of dynamics. There are no capacity caps for starters, while the budget is notably higher, £75mn compared to £10mn for Pot 1. Furthermore, of the £75mn budget, £24mn has been ringfenced for floating offshore wind and £20mn for tidal stream technologies. These technologies will certainly benefit somewhat from having ringfenced budgets, whilst others will simply enjoy the fact that conventional offshore wind sites will not be competing against them, but instead as a separate Pot 3. The limiting factors for the Pot 2 auction will be the higher LCOE’s for such technologies, meaning the budget will become used up by less capacity, but also the comparatively smaller pipeline of eligible assets compared to Pot 1.
With no capacity cap and a £200mn budget, and amid a government target of 40GW of offshore wind by 2030, the Pot 3 auction is poised to secure the largest amount of capacity in CfD AR4. The pipeline of eligible capacity is certainly much higher than the overall Pot 1 capacity cap (for comparisons sake), but some uncertainty for a few sites still remains. Perhaps what’s more staggering is the amount of ineligible offshore wind capacity in the pipeline, with our Tracker service showing upwards of 65GW out there hoping to develop beyond AR4, perhaps via future CfD allocation rounds.
While our Renewables Pipeline Tracker and bespoke consultancy projects have quantified the potential and likely AR4-eligible capacity for Pot 1, 2 and 3 technologies, some uncertainties as to the outturn competition levels remains at this stage. Such uncertainties may include: How many sites managed secured grid connection agreements or planning consent in time for the application window? Will all eligible sites enter or instead seek alternative routes to market (such as a Corporate Power Purchase Agreement (CPPA))? Have sites already confirmed they are going “subsidy free”? And will developers bid their sites’ whole capacity or just a fraction of their grid connection capacity?
Bidding strategies – what’s the game plan?
Following the application window, developers will be looking towards any potential sealed bid window and assessing their own view of their bidding strategy. I say a “potential sealed bid window” as this will only apply should the Delivery Body determine the need for an auction-based upon the qualifying applicants. As previously mentioned, the sealed bid window may vary depending on the application qualification process – the earliest possible window to see sealed bids submitted is 9th – 29th March 2022, whilst the latest possible window is 24th May – 15th June 2022.
Regardless of individual bidding strategies, the high levels of competition is expected to put pressure on clearing prices across Pots 1, 2 and 3. Pot 1 clearing prices outturning lower than the last established technology auction in 2015 is nothing short of a given, but nonetheless, the auction will be highly revealing as to how much the LCOE of such technologies have changed over the years. A key question is, will solar PV or onshore wind prove themselves more competitive? Based on the administrative strike prices set by BEIS, at £47/MWh for solar and £53/MWh for onshore wind, it suggests solar may have the edge over wind. However, there have been recent reports that solar developers are facing rising PV module costs, while technological improvements to onshore wind have led to improved load factors in recent years. Solar PV sites may also aim to increase their load factors and therefore competitiveness, such as via bifacial panel arrangements. Overall, each site’s LCOE will depend on highly site-specific and locational characteristics, meaning that it is not possible to determine bidding prices based on technology average LCOE’s alone.
Should an auction be required (by far the most likely outcome), Pot 2 sites are likely to see a wide range of bid prices based on the spread of technologies in the auction. The ASPs for Pot 2 has remote island wind at £62/MWh, whilst wave is set at £258/MWh. While floating offshore wind and tidal stream technologies have been given minimum budgets, which could result in some within-technology competition, other technologies will compete for the remaining budget with both the ASPs and our own pipeline view suggesting remote island onshore wind may take the lion’s share.
For Pot 3, a key question for observers will be whether or not the previous record low prices set by offshore wind (at £39.65/MWh in the 2019 auction) will be broken? For offshore wind developers, however, parties will want to ensure they are considered ahead of other applicants whilst pricing themselves to have as little impact against the £200mn budget as possible. Our previous Chart of the Week showed that the £200mn allocated to offshore wind could procure between 2.8GW and 8.9GW of capacity, based on a strike price range between £37/MWh (a slight discount to the lowest clearing price for offshore wind in AR3 of £39.65/MWh) and the ASP of £46/MWh.
The potential for low clearing prices in AR4 means many developers are also considering alternative routes to market. These developers may find alternative options more attractive than AR4, such as going merchant via a subsidy-free utility PPA, or seeking a CPPA that can also offer a long-term fixed-price but at a better level. These alternative options may impact both the amount of capacity that chooses to enter CfD AR4, and the bid prices that some assets choose to submit. Some assets may even choose to hedge capacity across different routes to market. Unlocking routes to market options outside of the CfD is something we are discussing separately in an upcoming webinar with Weightmans – sign up here.
Lastly (discussed here at least), is that ongoing reforms to network charging regimes will also influence how developers bid, which is currently creating uncertainty about future costs and revenues. A new Significant Code Review (SCR) recently proposed on the back of previous SCRs could impact future DUoS charges, while a wide-ranging review of TNUoS charges is on the table following a recent Ofgem call for evidence.
How can we help?
2022 is poised to see significant developments regarding routes to market for renewables, either via CfD AR4 or alternative options. We are providing CfD AR4 support through our Renewables Pipeline Tracker service, as well via bespoke Consultancy projects looking at potential auction outcomes and competitive dynamics. We are also providing routes to market support through our range of PPA insight service subscriptions across renewables and flexibility markets, while our Consultancy team works on bespoke routes to market projects, helping to navigate market participants through a highly dynamic market space.
