The recentContracts for Differenceauction has strengthened the push towards offshore wind becoming a major player in the UK energy market. Contracts for Difference were first awarded in 2015 and since then two additional auctions have taken place. The framework involves a private contract between developers and the Low Carbon Contracts Company (LCCC), developers receive a fixed fee for the electricity in which they generate for a 15-year period. If there is a difference in the strike price and the wholesale power price, the Government then tops up the cost thus ensuring the developer is not left financially out of pocket.
The September announcement saw 12 renewable projects being awarded contracts through the CfD framework with 6 of the projects being offshore wind farms, double the amount awarded back in 2017. The offshore wind farms have a combined capacity of 5.5GW, representing 95% of the capacity which received the contracts for difference and have the capability to power 6.9 million UK households once energised. The energisation of the new offshore wind farm generation capacity will coincide with the decommissioning of 4GW of coal and nuclear generation sites. The winning bids came from Innogy for the 1400MW Sofia wind farm, Equinor in partnership with SSE for the 3 Dogger Bank wind farms each rated at 1200MW, and a sole SSE project, the 454MW Seagreen wind farm.
Offshore wind was not the only beneficiary of the Contracts for Difference funding: 4 onshore wind projects situated in remote Scottish islands received contracts for difference. The Muaithebhal (189MW), Hesta Head (20MW), Druim Leathann (49MW) and Costa Head (16MW) projects were all awarded funding in a push towards the Scottish Islands becoming a “green energy powerhouse”. 34MW of advanced conversion technology also received CfDcontracts.
The auction saw record low prices of £39.65/MWh and £41.61/MWh (index linked to 2012 prices) for offshore wind power generation, representing a 30% decrease when compared to the previous Contracts for Difference auction in 2017. The Contracts for Difference scheme has allowed for the price of offshore wind power generation to decrease dramatically since its inception. The first Contracts for Difference auction (2015) saw the price of offshore wind generation valued at £114-120/MWh, compared to the recent auction which represents a 65% price reduction.
The reduction in cost trend for power generated from offshore wind is expected to continue over the next few years with power generated from offshore predicted to be cheaper than existing gas power plants in 2023[1]. The Contracts for Difference auction represents a great opportunity for developers where previously the CfDs were seen as vital to the profitability of the site, now it is seen as more of a stabilizer mechanism as it is not the sole revenue stream and some developers are comfortable with merchant trading and no long-term guarantee of revenue sources.,
The Contracts for Difference framework can only be seen as an additional benefit for a developing project and is not the sole factor when deciding to proceed with a new offshore wind development. The associated large capital and operating costs have created doubts as to whether the offshore CfD projects can be built and operated in a cost-effective way for the price that has been awarded in the 2019 auction.
