Energy industry urges UK Government to reform clean power auctions

4/07/23 | News release
Floating wind turbine

Three energy trade associations, Scottish Renewables, RenewableUK and Energy UK have written a joint letter to the Secretary of State for Energy Security and Net Zero Grant Shapps, urging the UK Government to make urgent changes to their annual clean power auctions, known as Contracts for Difference (CfDs).

The trade bodies have put forward a series of recommendations to lower energy bills by maximising private investment in renewable technologies, while also ensuring that we grow industrial supply chains throughout the UK, creating tens of thousands of high-quality well-paid jobs.

In the letter, the trade bodies state: “Jointly we believe that a broader approach is needed in defining how best value is delivered from Allocation Round 5 (AR5) onwards for the industry and consumer. This should take account of the current economic environment, international competition in the sector and the benefits to UK plc from the timely deployment of homegrown, cost-effective renewable energy”.

Specifically, the letter warns that: “The current emphasis on securing renewable capacity at the lowest possible strike price - minimising expenditure rather than maximising benefit -  risks creating a less attractive investment environment in the UK. The race to the bottom on strike prices incentivised by the current auction process is at odds with the reality of project costs and investment needs, jeopardising deployment targets. This is especially relevant for supply chain companies that have been recording losses as the continuous squeeze on strike prices has been passed on to them. CfD strike prices are no longer cost reflective and, consequently, the industry’s capacity to invest in critical infrastructure and domestic supply chain is being eroded”.

The trade associations point out that the US and the EU have stepped up their ambitions for renewable energy significantly, offering financial incentives and supportive regulations to developers and supply chain companies. They highlight the fact that as a result of these measures, the UK’s position as a world leader in clean energy can no longer be guaranteed.

The letter puts forward a series of recommendations to address these issues. These include reassessing and uplifting the budget for this summer’s auction (AR5), as since it was announced in March, a number of new projects have become eligible to bid. The  budget for fixed-foundation offshore wind alone would need to be at least two and a half times higher than its current level to maximise the capacity which could now be secured in this year’s auction. It also suggests that fixed-foundation offshore wind should be put back into a separate budget pot to maximise deployment.

The second measure focuses on the need to support emerging technologies such as floating wind and tidal stream projects, to accelerate cost reductions and build up supply chains. This could be achieved by setting clear deployment targets and ringfencing budgets for each technology, to ensure that each secures a minimum amount of new capacity.

The third recommendation urges Ministers to ensure that in future auction rounds, CfD parameters should reflect their economic environment more closely in terms of supply chain costs and interest rates. The letter notes that the methodology used to date has not provided enough transparency or reassurance to developers that changing economic circumstances will be factored appropriately into the auction process. A clear schedule with auction parameters, budgets and capacity targets would provide a clear roadmap towards net zero.

The trade associations conclude that the definition of the value of CfDs to consumers should be fundamentally reframed to reflect the UK’s net zero targets and to maximise the amount of renewable capacity which could be delivered at a lower cost than new gas projects.

Andrew MacNish Porter, Policy Manager at Scottish Renewables, said: 

“The Contracts for Difference scheme has played a key role in renewable energy being the cheapest form of electricity in the UK. Building on this success, the renewable energy industry is poised to make significant investments in projects with the potential to deliver economic growth and create thousands of high-skilled jobs across the UK.

“However, the latest CfD has failed to account for an increasingly challenging economic environment and there is a real risk that this summer’s auction will fail to secure this much needed industry investment. We urge the government to reassess the parameters of this year’s auction immediately as well as consider longer term reforms to ensure the CfD delivers maximum value for the UK economy as we continue our transition to net-zero. As competition for investment in clean energy ramps up globally, there is no time for delay.”

RenewableUK’s Executive Director of Policy and Engagement Ana Musat said: 

“The parameters set by the Government for this summer’s clean energy auctions are incredibly tight, and could even fail to unlock investment in shovel-ready renewable projects. These projects would not only deliver lower bills and new jobs in the sector, but are critical for maintaining the UK’s position as a global leader in renewables. International competition for investment in clean tech has never been more intense, so Ministers have to act quickly. Time is running out, not only to secure new renewable projects in the coming months, but also to set up a framework for the rest of this decade to ensure that longer term investments in manufacturing come to the UK instead of going overseas”.  

Energy UK’s Deputy Director Marta Krajewska, commented:

“The Contracts for Difference scheme has been hugely successful in supporting the expansion of clean, cheap, homegrown low carbon power. However if the scheme is to continue playing this vital role and delivering value to consumers, there needs to be a recognition of the costs increases, along with much greater international competition, that have accumulated for renewables projects over recent months. So we support the call for some necessary adaptations to the scheme, in order to deliver the amount of projects and capacity we urgently need to ensure our energy security, cut bills and reduce emissions”.

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