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AR5 CFD Auction Results

This morning, the outcome of Allocation Round 5 of the Contracts for Difference was published. 3.7GW of capacity won contracts with approximately 40% granted to onshore wind (exclusively in Scotland), and over 50% going to solar PV (mostly in England). However, there was a marked absence of any offshore wind.

A noteworthy development is the allocation of contracts to three geothermal energy projects for the first time. Tidal stream energy has expanded its share from AR4, and was also awarded the highest strike price by a distance.

Absence of Offshore Wind Bids

In another instance of UK CFD auction firsts, no offshore wind bids were submitted. This occurrence is believed to be the result of bidders finding the administrative strike price, a figure representing a fixed price cap, being too low.

The lack of offshore wind capacity secured at this auction puts a dent in the extremely ambitious target of 50GW offshore wind capacity set by the government to be installed by 2030.

Currently, around 14GW offshore wind has already been installed, with a further 13GW from prior auctions yet to be built.

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Lower Offshore Wind Targets Are More Feasible

It is worth putting into context that 50GW offshore wind, assuming a 40% load factor, could generate approximately 150 TWh of electricity. When combined with other low-carbon sources like onshore wind, nuclear, solar, hydro, and biomass, which would generate at least 140 TWh together at the least, the total combined volume would surpass the current UK demand of roughly 250 GWh.

The government’s 50GW target by 2030 may completely overshoot the UK’s short to medium term electricity needs. Considering that 30-35GW of offshore wind would still deliver over 100TWh, not achieving the 50GW target may not be the disaster that some forecast.

Renewables Thrive Beyond Offshore Wind

The AR5 auction, however, does prove that considerable volumes of renewables can be delivered without Offshore Wind, with 3.7GW representing the third highest capacity cleared so far across the auction cycle. It also indicates that the UK Government resisted the push from Offshore Wind developers to significantly increase the administrative strike price, favoring moving forward with other technologies. It is likely, however, that the strike price for the next auction may be adjusted to allow for the inflation which has hit the offshore wind market specifically.

Future auctions are due to be held annually now, with AR6 due to clear in September 2024. Having more regular and likely smaller auctions will allow these adjustments to take place and a more targeted approach to be set.

Financing Infrastructure: The Consumer’s Burden

Considering the nearly 1.5GW of new onshore wind to be exclusively connected in Scotland, the AR5 auction reveals the urgent need for a greater focus on expanding North-South Transmission Infrastructure and the resultant increase in balancing costs which result from it.

Such an investment, however, is not dealt with through these open auctions; instead, they are levied on the bills of end customers via fixed £/Meter standing charges, the increases of which don’t get nearly the same publicity as these results.

Additional Comments

Large rises in Balancing Costs, Transmission Costs and Distribution Costs are not managed by the levy control framework and the scrutiny that it puts on the CFD levy as is being done in AR6 which also considers other externalities and supply chain factors in determining winners.

All cleared prices are in 2012 prices meaning that in todays (2023) prices they would be around 35% higher. As the prices are linked to inflation when they are due to be delivered, expect them to be considerably higher still.

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