Qualified success for onshore wind & solar in UK’s CfD Round 5
Following the UK government’s announcement of the results for its CfD Allocation Round 5 on September 8, much of the initial response naturally focused on the absence of any offshore wind bids, but the details of the successful onshore wind and solar entries also provide pointers to changing conditions in these sectors too.
While much soul searching is expected over the coming months to address the clear faults with auction design for offshore wind, some 3.5GW of onshore wind and solar capacity will be able to progress into construction off the back of what was seemingly a successful auction for these technologies.
Energy Rev has now crunched the numbers from the contest, giving definitive details of which companies won contracts for the most capacity across solar and onshore wind. SSE walked away from the fifth CfD round with incentives for the highest aggregate capacity, with 605.4MW split between onshore wind (381.8MW from three projects) and remote island wind (one 223.6MW project), with its total around double the next biggest winner: Low Carbon with 304.4MW spread across 10 solar sites. Energiekontor (242.4 from five projects), EDF (208.8MW from two), RWE (167.7MW from three), Boralex (106MW from one), Statkraft (93.1MW from two), Coriolis Energy (67.2MW), ESB / REG (63MW), EDPR (40.8MW), Pennant Walters (34.8MW), Red Rock Power (31.1MW), Wind Estate (29.1MW), and EDPR-owned Vento Ludens (15MW) complete the list of successful onshore wind bidders.
Meanwhile, following Low Carbon in the solar bidding is RWE-owned JBM Solar (281.9MW from six sites), Enso / Cero (186.2MW, four projects), Bluefield (175.2MW, four), Aura Power (139.8MW, three), Sonnedix (131.21MW, four), Elgin Energy (91MW, three), Opdenergy (87.8MW, three), Voltalia (84.8MW, three), NextEnergy (75MW, two), Statkraft (50MW), Lightsource BP (50MW), Solar 2 (50MW), Banks Renewables (40MW), ILOS Energy (40MW), Baywa / Grune Energien (38.6MW), Greentech (38MW), BSR Energy (37.6MW), DIF (19.6MW), and Luminous Energy (6.7MW).
These groups will enjoy higher tariffs than their counterparts from Allocation Round 4 in 2022 as strike prices for onshore wind rose from GBP 42.47/MWh to GBP 52.29/MWh, while solar contracts also grew a little from GBP 45.99/MWh to GBP 47/MWh (all in 2012 prices). It is worth noting that round five winners will generally also receive extra years of indexation on their tariffs.
Successful PV bidders in fact cleared at the maximum administrative strike price set before the auction, suggesting the process was undersubscribed, or at least not oversubscribed, compared to the total budget available. That is not at all surprising given that these assets were due to compete against offshore wind, meaning that a huge chunk of budget which was expected to be allocated to offshore suddenly became available for other assets. Onshore wind also cleared at very close to its own administrative strike price.
“I think this was certainly the year to go for a CfD for onshore wind and solar,” one successful bidder told Energy Rev on Friday. “The cynic in me believes that the government thought offshore would blow through the budget [leaving little for PV and onshore] and this backfired on them…however, offshore should pile back in in future years.”
Cost increases, in the supply chain but also capital costs, have been widely fingered as the primary reason for the lack of offshore entries this year, essentially removing the ability of companies to lodge offers at or below the administrative strike price set for that technology this time. Some estimates suggest up to 40% rises in some development costs for these players.
However, perhaps to a lesser degree, solar and onshore have also faced similar rises, with one solar developer telling Energy Rev that costs had risen, “probably not by 40%, but the increased strike price doesn’t quite cover our cost increases. EPC costs are now markedly higher than for similar projects in, say, 2019.”
Meanwhile, a winning onshore wind bidder said, “The strike price works for us, but we were lucky enough to have locked in turbines over a year ago and have already started enabling works, although inflation is applicable for future years. “Costs have gone up quite. So, this strike price works now, but not for the future,” they added.
Alternative Routes to CfD for wind
Despite the challenges in the offshore wind projects, there is some satisfaction that the contracts won during the auction round compare favourably to alternatives in the market currently.
The CfD awards its tariffs in 2012 prices, which means that winners will actually receive real-terms contracts much higher than the quoted figures, with successful onshore wind bidder Boralex detailing that GBP 52.29/MWh in 2012 is now equivalent to GBP 72.35/MWh (as of July 2023).
Two developers contacted by Energy Rev have recently seen viable 10-year corporate PPAs on offer for GBP 75/MWh, although one of these was offered on an entirely non-indexed basis. These deals are also five years shorter than CfDs and with undeniably less credit-worthy counterparts than the UK government.
With longer-term forward price forecasts also dropping, the corporate PPA market and merchant alternatives may prove even less valuable to developers in the future, reinforcing the stability provided by CfDs.
Aside from rising costs and supply chain disruptions, wind developers, particularly within offshore wind, are faced with delays in acquiring approval to develop assets. If the government responds quickly to industry concerns and tweaks bidding conditions for offshore wind, perhaps developers of those projects can once again enjoy that stability too.
Meanwhile, looking ahead for onshore wind, the round five CfD results incidentally came during the same week as the UK government was touting changes to the National Planning Policy Framework which has since 2015 placed a de facto ban on new onshore wind development in England.
This resulted in all but one of the CfD-winning onshore wind farms being sited in Scotland (with the other in Wales), but those anticipating a boom in new developments in England may need to wait a little longer.
Pro-wind figures in government have been heralding the amendments as a boon for the sector, but legal commentators have widely judged the proposals as likely to have little impact.
The row centres on the proposed changing of wording to footnote 54 of the framework, which previously has called for “community backing” of onshore wind farms, while the new phrasing still proposes “community support” as a test for developers to hurdle. Due to this, it is easy to assess that little will change, and some market participants have called for the deletion of footnote 54 entirely as the only way to get onshore wind development in England back on track.
While CfDs are instrumental, wind developers will likely need to pursue alternative routes as well as require further support from the government to develop assets. Amidst high inflation and supply chain disruptions, it is crucial for the government to provide an additional boost to the industry if needed.