Will the latest CFD auction prove as controversial as the Hinkley agreement?
Whatever new generation secures support in the next round of CfD auctions there will be an increase in consumer energy bills. How did we get here?
Before the end of the year, the latest round of Contracts for Difference (CfD) auctions will have been completed. This will help new low-carbon projects to come on-line from 2021. There have been delays over the process, with more participants seeking entry, and the actual results of this long process will not be known until September. Regardless of what new generation secures support, the auctions will lead to an increase in consumer energy bills, so it is important to understand how we got to this point.
CfDs were introduced as part of the Government’s Energy Market Reform (EMR) package and are designed to provide support to new renewable capacity through a series of auctions. It was developed to replace the Renewables Obligation (RO) scheme, which officially closed to new entrants in 2017. The auctions provide successful applicants with a Strike Price.. The Strike Price is essentially the guaranteed price the generator will get for all of its output. The generator is still exposed to the wholesale market, but when wholesale prices are below the agreed Strike Price, the revenue it receives is ‘topped up’ to the value of the Strike Price. The Strike Price also rises with inflation, so the returns increase a little each year.
The cost of this top-up support is passed on to electricity suppliers, and then paid for by consumers through a levy on electricity bills.
CfD Basic Worked Example
The Windy Hills Wind Farm has a capacity of 30MW and secures a CfD contract with a Strike Price of £80/MWh:
- In Year 1 of the CfD contract, the prevailing electricity wholesale price is £50/MWh.
- This would generate a revenue from the regular electricity market of £4.6 million.
- However, the Strike Price is set at £80/MWh, so the guaranteed income the wind farm should get is £7.4 million.
- As such, the site will receive a top-up payment of £2.8 million for the year.
- This will have to be recovered from all energy consumers in the form of a levy on energy bills.
What is happening now?
The current CfD auction officially began at the start of April 2017, when the window for applications was opened. The actual auction itself will not take place until August at the earliest, which is much later than expected, as many seeking to take part are appealing a decision by National Grid to bar them entry. As such, the full results will not be made public until September.