Ding, ding… Round 2: looking ahead to the UK’s second CfD auction by Chris Willow

After the burst of activity surrounding the first UK Contract for Difference (CfD) auction culminating last February, there has been a prolonged lull after the Government decided not to hold another auction a year later as it reset (again) its long-term energy strategy.

Things should get moving again in 2016, however, following the Energy Secretary Amber Rudd’s announcement that the Government will hold three auctions before 2020, with the first of which will kick off this year. So what should we expect?

First of all, projects competing in this round will be coming online after 2020 – the Government has secured all the capacity it needs to reach its target of 10GW by the end of 2020, so is now starting to build the pipeline after this. This means the Government needs to start giving visibility of the post-2020 Levy Control Framework budget, giving us new insight into how much capacity could be installed in the next decade. It also means supply chain companies can start getting past the mental barrier of 2020 and think about the longer-term opportunity.

In terms of projects that could win the auction, Triton Knoll has to be one of the favourites. This is despite the Norwegian government pulling the rug out from beneath co-developer Statkraft’s renewable expansion plans by deciding to take NOK 500 billion (£388 million) out of the company that had been earmarked for offshore wind projects. Close to shore and in shallow water, our cost of energy analysis suggests that this project will be very competitive.

Up in Scotland, it is likely that the developers of the Moray Firth and Inch Cape zones will be throwing their hats in the ring, including with Chinese and other new finance. If one (or both) of these projects secure a contract, it would make 2016 a year to remember for Scotland – Beatrice and Neart Na Gaoithe could also both reach FID this year, triggering procurement decisions that will stimulate the UK’s supply chain.

On a more sombre note, Navitus Bay, which was once a likely candidate for this CfD auction, will not be competing following the Planning Inspectorate’s decision to reject its application.

There are also several potential longer shots. ScottishPower Renewables may look to finish what it started and build out the rest of East Anglia ONE. There is the slim chance that the CfD budget may be big enough for Forewind to consider pushing forward a gigawatt or more of the Dogger Bank zone. SMartwind may also be thinking about accelerating the next phase of the Hornsea zone following its Planning Inspectorate decision that is due in mid-2016.

It is worth remembering that the original vision for all these Round 3 zones was to enable developers build pipelines of activity and give the supply chain long-term visibility so it could invest in manufacturing capacity and R&D in confidence. The Government’s current approach is strangling this intent somewhat.
Whichever projects compete, the Government is going to be looking closely at the results – both in terms of reducing the cost of energy (and hence subsidy levels) and increasing the UK content. Getting ministers feeling comfortable about the industry’s progress on these two fronts is going to have a big impact when they start thinking about how positive they’ll be about the next two CfD auctions and in setting the course for the rest of the 2020s.

 

Chris Willow

Associate Director

BVGA

2017-05-12T15:18:27+00:00 06/01/2016|Views|