Contracts for Difference — the future for onshore solar and wind?

On 13 September 2021, the Government announced a £265m draft budget for allocation round 4 of the Contracts for Difference scheme, the Government’s flagship policy for supporting the deployment of renewable generation.

For the first time since 2015, onshore wind and solar are able to bid for a CfD as a “Pot 1” technology. However, only £10m has been allocated for Pot 1 with a 3.5GW capacity cap for each of onshore wind and solar, which is subject further to an overall cap of 5GW for all of Pot 1. This is a fraction of the £200m which has been allocated for offshore wind.

It may be tempting to view this as an insult to these technologies. The opposite is true. Onshore wind and solar projects are so cost-effective that the Government expects auction prices to be so low that it can support the deployment of renewable projects at very little cost to the taxpayer. Assuming a low strike price is set by the auction and that wholesale electricity prices subsequently rise; generators would be required to pay money back into the CfD budget — a good outcome for the Treasury and taxpayers.

The real issue is whether the guarantee of a CfD with a low strike price will be enough to facilitate the deployment of projects which are currently waiting to be constructed. This will require developers and funders to assess the loss of any potential upside from volatile, but possibly rising, electricity prices against the certainty of a lower but guaranteed long term revenue stream. This will come down to the risk appetite of individual investors. Those who are more risk-averse or who may be constrained by their investment mandates are likely to favour the CfD route.

Another important factor will be CAPEX costs. In absolute terms, renewable energy costs have fallen significantly since 2015, the last time onshore wind and solar could bid for a CfD. Conversely, for the first time in many years, we are now seeing a rise in supply chain and commodity costs which may have a knock-on effect on the viability for some onshore wind and solar projects — especially if aggressive bidding pushes the strike price below the point of commercial viability.

With that in mind, developers and funders of onshore wind and solar projects should continue to look at other routes to market such as long-term corporate power purchase agreements (PPAs), a topic which is increasingly on the agenda of corporates and public bodies who are looking to decarbonise their operations. 

In either case, getting the right advice is key. Our energy and utilities team can help you with all aspects of your renewable generation projects having advised on CfDs and corporate PPAs in the past.

Please get in touch to see how we can help you succeed.