In designing an offshore wind auction, governments typically have a range of political goals in mind. In some cases, it is the lowest power prices or the best return for the exchequer. In other cases, governments wish to use the auction to achieve wider socioeconomic or environmental benefits but with the risk that bid prices are not as low (in the case of offtake auctions).
For the first six CfD allocation rounds (ARs), the UK Government has sought to have it both ways. While the allocation was strictly on price, the supply chain plan (SCP) prequalification was intended to encourage a range of ‘good deeds’ by industry.
It’s fair to say that the SCP approach was not wholly successful. Developers were understandably reluctant to weaken the competitiveness of their bids by making bold commitments with cost or risk implications. The Government was wary of barring developers with unambitious SCPs from the allocation round because this would weaken competition in the auction.
Last year, the UK Government consulted on the introduction of non-price factors into the CfD allocation to create greater incentives for developers to meet public political objectives. This has since morphed into Sustainable Industry Rewards (SIRs), which seek to reward proposals for UK supply chain investment or science-based environmental gains, starting with the 2025 AR7. This has the benefit of ensuring that the auction remains purely price-based but with a clear financial support for doing ‘good deeds’.
Despite this, it is far from clear that SIRs will have the desired effect, at least in the short term.
Developers may make the final investment decision (FID) on a project a year after success in the allocation round. Any commitment ahead of FID is expenditure at risk and so developers focus their activities on reducing uncertainty by finalising wind farm design, securing consent and grid connection – steps needed to enter the auction. They may make supply chain commitments but generally only when lead times or supply chain constraints threaten the project’s timetable. Making such an early commitment to a UK supplier would not generally make sense – unless the Government makes the potential reward attractive or carries a very sharp stick. A further concern is that even early commitments made in SIR proposals, once approved by Government. are still not early enough to enable new factories to produce components in time for construction.
For AR7, the rewards and penalties seem insufficient, and developers are likely to meet only the minimum requirement, which seems likely to be a fairly low bar. Developers will be looking ahead to AR8 with interest to see how the SIRs framework evolves. Whatever the Government decides, it will need to be bold if it’s to lead to meaningful change, both in terms incentivising significant proposals and resolving the timing issue. The supply chain will hope that it is. Potential investors now have the opportunity to pitch their investment plans to developers with the hope that inclusion of their proposition within SIR proposals from a number of developers can de-risk the investment sufficiently – still not an easy ask.
