Contracts for Difference

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Contracts for Difference (CfD) are the main market support mechanism for low carbon electricity generation in the UK. The scheme replaced the Renewables Obligation which closed to new generation in March 2017. It is administered by the Low Carbon Contracts Company (LCCC), which is owned by the UK Government.

Contents

The scheme offers a fixed "Strike Price" to generators over a 15-year contract, which provides financial certainty, unlike the wholesale electricity market which can fluctuate significantly. With the contract for difference, if the market price for electricity drops below the Strike Price, LCCC pays the generator the shortfall, however if the market price rises, the generator must pay back the difference. The costs of the scheme are passed onto consumers via their electricity bills. [1]

The contracts are awarded using a reverse auction in annual "Allocation Rounds" (AR) where companies submit sealed bids for a project capacity and cost. Contracts are awarded to the lowest cost projects first, until a predefined budget or capacity cap is reached. The budget is split into different 'Pots' which different technologies can bid into, [2] although these have varied by auction.

Bids cannot be above a maximum "Administrative Strike Price" set before the auction. [3] To make comparison between years easier, all Strike Prices are quoted in 2012 prices, but projects are paid an inflation-adjusted amount linked to the Consumer Price Index (CPI). The projects also set out a delivery year, when the projects is expected to be commissioned, however this may slip for various reasons. [1]

History

In December 2010, the Government introduced plans to reform the electricity market. [4] The Electricity Market Reform (EMR) introduced both a capacity market to incentivise reliable generation and Contracts for Difference to provide revenue certainty to developers investing in low carbon and renewable energy, but at a lower cost that the Renewables Obligation. [5]

Prior to the first Allocation Round, there was a mechanism called Final Investment Decision Enabling for Renewables. [6] This awarded CfDs to five offshore wind projects, two biomass conversion projects, and one dedicated biomass with combined heat and power, with a total capacity of almost 4.5 GW. [6] [7]

Separately, the Government also awarded a CfD to Hinkley Point C nuclear power station, set at £92.50/MWh for a 35 year period. [8] This is 20 years longer than other CfD contracts. See §Cost to consumers of the Hinkley Point C article for further discussion on the costs.

Results of the first three auctions were announced in February 2015, September 2017, and October 2019. Starting with AR4 in 2022, subsequent auctions have been on an annual basis.

In 2024, the Department for Energy Security and Net Zero (DESNZ) consulted on proposed updates to the CfD starting in AR7. Two main changes to the scheme were published in October. Firstly, Adding support for repowering of onshore wind projects after 25 years of commercial operation. Support for repowering other technologies may be added in future. Secondly, extending the phased approach for fixed offshore wind projects to floating, allowing them to be built in up-to three phases to reduce construction risk. [9] [10]

The Clean Power 2030 Action Plan, published by DESNZ in December 2024, indicated further targeted reforms would be implemented before the AR7 auction, subject to further consultation. This includes reviewing the budgeting parameters for fixed offshore wind, and relaxing the eligibility criteria of requiring full planning permission for fixed offshore wind projects. [11]

In November 2024, the Clean Industry Bonus (CIB) was launched. This provides additional CfD support to offshore wind projects (both fixed and floating) that invest in more sustainable supply chains. However, to be applicable for AR7, offshore wind projects need a CIB. It will have a budget of £27m per GW of capacity in AR7, and the application process will run from 13 to 19 February 2025. The CIB was initially introduced as Sustainable Industry Rewards, but was later renamed. [12] [13]

Allocation Rounds

AR1 (2014/15)

The first Allocation Round auction started in October 2014, with results announced on 19 February 2015. [14] The maximum prices are given in the first table below. A total of 2.1 GW of contracts were awarded, primarily for two offshore wind projects, the 714 MW East Anglia 1 and the 448 MW Neart Na Gaoithe, plus 15 smaller onshore wind projects. [15]

Administrative Strike Prices for AR1 by technology and delivery year (£2012/MWh) [5]
Pot/Technology2014/152015/162016/172017/182018/19
Pot 1 (established)
Onshore Wind (>5 MW)9595959090
Solar photovoltaic (>5 MW)120120115110100
Energy from Waste (with CHP)8080808080
Hydro (>5 MW and <50 MW)100100100100100
Landfill gas5555555555
Sewage gas7575757575
Pot 2 (less established)
Offshore wind1551551560140140
Tidal stream305305305305305
Wave305305305305305
Advanced Conversion Technologies (with or without CHP)155155150140140
Anaerobic digestion (with or without CHP) (>5 MW)150150150140140
Dedicated biomass (with CHP)125125125125125
Geothermal (with or without CHP)145145145140140
Pot 3
Biomass conversion105105105105105
Results for AR1 by technology and delivery year [5]
Pot/TechnologyCapacity (MW)№ of

projects

Strike Price (£2012/MWh)
2015/162016/172017/182018/192015/162016/172017/182018/19
Pot 1 (established)
Onshore Wind (>5 MW)—4577.5626.0515—79.2379.9982.50
Solar photovoltaic (>5 MW)32.8838.67——550.0079.23——
Energy from Waste (with CHP)———94.752———80.00
Pot 2 (less established)
Offshore wind——7144482——119.89114.39
Advanced Conversion Technologies——36263——119.89114.39
Total32.8883.67827.501194.8027————

AR2 (2017)

The second round ran from April to September 2017. [16] As announced in the 2016 budget, no funding was allocated in Pot 1 for the more established technologies of onshore wind, solar PV, hydro, energy from waste with CHP, landfill gas, and sewage gas. Instead, a Pot 2 budget of £290m for less established technologies, of which offshore wind was expected to form the majority. [17] Nearly 3.2 GW of contracts were awarded for three offshore wind farms: Triton Knoll (860 MW), Hornsea Project 2 (1386 MW), and Moray Offshore Windfarm (East) (950 MW). Several smaller projects for advanced conversion technologies and dedicated biomass with CHP were also funded. [18]

Parameters and results for AR2 by technology and delivery year [18] [19]
Pot/TechnologyASP (£2012/MWh)Capacity (MW)№ of

projects

SP (£2012/MWh)
2021/222022/232021/222022/232021/222022/23
Pot 2 (less established)
Offshore wind1051008602336374.7557.50
ACT (standard or advanced; with or without CHP)12511556.318674.7540.00
Anaerobic digestion (with or without CHP; >5MW)140135—————
Dedicated biomass (with CHP)11511585.64—274.75—
Wave310300—————
Tidal stream300295—————
Total——1001.95234411——

AR3 (2019)

The auction process for AR3 took place between May and September 2019, with results announced in October. Of the £265m annual budget, £200m was for offshore wind, £24m for floating offshore wind, and £10m for onshore wind, with the remaining £31m for other less established technologies including (onshore) remote island wind. [20] AR3 delivered record low prices for offshore wind, with contracts to deliver in 2023/24 came in at £39.650/MWh and those delivering in 2024/25 at £41.611/MWh. [21]

Parameters and results for AR3 by technology and delivery year [22] [23]
Pot/TechnologyASP (£2012/MWh)Capacity (MW)№ of

projects

SP (£2012/MWh)
2023/242024/252023/242024/252023/242024/25
Pot 2 (less established)
Advanced Conversion Technologies11311127.56.1239.6541.611
Anaerobic digestion (>5 MW)122121—————
Dedicated biomass with CHP121121—————
Geothermal129127—————
Offshore wind565312122854639.6541.611
Remote island wind (>5 MW)8282225.7249.5439.6541.611
Tidal stream225217—————
Wave281268—————
Total——2865.222909.612——

AR4 (2021/22)

The auction for AR4 took place between December 2021 and July 2022, and re-introduced Pot 1 for established technologies. Of the total £285m budget, a £20m ringfence was set aside for tidal stream projects in Pot 2, [24] and for the first time four contracts totalling just over 40 MW were awarded CfDs, MeyGen, Magallanes Renovables, and two for Orbital Marine Power. [25] The first contract for a floating offshore wind turbine was also awarded, to Hexicon AB for their 32 MW TwinHub project. [26]

Parameters and results for AR4 by technology and delivery year [27]
Pot/TechnologyASP (£2012/MWh)Capacity (MW)№ of

projects

SP (£2012/MWh)
All delivery years2023/242024/252025/262026/272023/242024/252025/262026/27
Pot 1 (established)
Solar PV (>5 MW)47251.381958.03——6645.9945.99——
Onshore Wind (>5 MW)53—887.96——10—42.47——
Energy from waste (with CHP)121—30——1—45.99——
Pot 2 (less established)
Tidal stream211——5.6235.24——178.54178.54
Floating offshore wind122———321———87.30
Remote Island Wind (RIW)62———597.66———46.39
Offshore Wind46———6994.345———37.35
Total—251.382875.995.627659.1493————

AR5 (2023)

The auction for AR5 took place between March and September 2023. The available budget was £170 million for Pot 1 (established technologies) and £35 million for Pot 2 (emerging technologies) including a minimum £10m ringfence for tidal stream. [28] Despite warnings from industry before the auction, there were no bids from offshore wind projects as the Administrative Strike Price was seen to be to low to cover the increases in supply chain and cost of capital. [29]

Parameters and results for AR5 by technology and delivery year [30] [31]
Pot/TechnologyASP (£2012/MWh)Capacity (MW)№ of

projects

SP (£2012/MWh)
All delivery years2025/262026/272027/28All delivery years
Pot 1 (established)
Energy from waste (with CHP)116—————
Hydro (>5MW and <50MW)89—————
Landfill gas62—————
Offshore wind44—————
Onshore wind (>5 MW)5331.1204.41245.242452.29
Remote island wind (>5 MW))53——223.6152.29
Sewage gas148—————
Solar PV (>5 MW)47393.96150.741382.985647.00
Pot 2 (less established)
Advanced Conversion Technologies182—————
Anaerobic digestion (>5 MW)136—————
Dedicated biomass with CHP162—————
Floating offshore wind116—————
Geothermal119—753119.00
Tidal stream202—4.548.5411198.00
Wave245—————
Total—425.06366.642905.3695—

AR6 (2024)

The auction for AR6 took place between March and September 2024. The budget was initially set at just over £1bn. [32] [33] Following the election, at the end of July, the budget for AR6 was increased by 50% to £1.555bn. [34] [35] The budget was split into three pots by technology: [33]

The Administrative Strike Prices were significantly increased from AR5. The Contracts for Difference Allocation 6 results were announced on 3 September 2024, with 131 projects being awarded contracts. [36] [37]

Parameters and results for AR6 by technology and delivery year [33] [36]
Pot/TechnologyASP (£2012/MWh)Capacity (MW)№ of

projects

SP (£2012/MWh)
All delivery years2026/272027/282018/29All delivery years
Pot 1 (established)
Energy from waste (with CHP)181—————
Hydro (>5MW and <50MW)102—————
Landfill gas69—————
Onshore wind (>5 MW)64272.58717.79—2250.90
Remote island wind (>5 MW))64—————
Sewage gas162—————
Solar PV (>5 MW)611091.542196.77—9350.07
Pot 2 (less established)
Advanced Conversion Technologies210—————
Anaerobic digestion (>5 MW)144—————
Dedicated biomass with CHP179—————
Floating offshore wind176——4001139.93
Geothermal157—————
Tidal stream261—10186172.00
Wave257—————
Pot 3 (offshore wind)
Offshore wind73——3363.07258.87
Offshore wind permitted reduction*n/a—1578.51—754.23
Total—1364.124503.073781.07131—

* offshore wind permitted reduction refers to projects that had a previously secured CfD, but have now been awarded a CfD at a higher price. The original contract allowed for up to 25% of the capacity to be withdrawn. [37]

AR7 (2025)

The seventh Allocation Round auction is expected to happen in 2025. Prior to this, the Clean Industry Bonus applications will take place in February 2025.

Generating capacity awarded

Capacity awarded (MW) by technology and Allocation Round [1] (n/a signifies technology was not eligible to bid into that auction)
RoundNuclearSolar PVOnshore windRemote island windOffshore windFloating offshore windTidal StreamBiomass conversionDedicated biomass with CHPEnergy from waste with CHPAdvanced Conversion TechnologyGeothermalTotal
Pre-AR13277——n/a3101——1052299———7729
AR1n/a72749n/a1162——n/a—9562—2140
AR2n/an/an/an/a3196——n/a86—64—3346
AR3n/a——2755466——n/a——34—5775
AR4n/a220988859869943241n/a—30——10792
AR5n/a19281481224——53n/a———123698
AR6n/a3288990—336340028—————9648
Total32777497410810962328243212210523851251601243127

See also

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References

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  3. ↑ Contracts for Difference Explainer (PDF) (Report). ITPEnergised. September 2021. Retrieved 5 May 2024.
  4. ↑ Barley, Shanta (16 December 2010). "Chris Huhne unveils plans for reform of UK energy market". The Guardian. ISSN   0261-3077 . Retrieved 4 May 2024.
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  8. ↑ "UK nuclear power plant gets go-ahead". BBC News. 20 October 2013. Retrieved 5 May 2024.
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  20. ↑ "Remote island wind set to benefit from latest support scheme". Shetland News. 13 September 2021. Retrieved 6 May 2024.
  21. ↑ KPMG (September 2019). "Blown away. CfD Round 3 delivers record low price for offshore wind" (PDF). Retrieved 5 May 2024.
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  24. ↑ Dykes, Andrew (24 November 2021). "UK Government announces £20m ring-fenced tidal funding in upcoming CfD". Energy Voice. Retrieved 6 May 2024.
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  35. ↑ "AR6 Budget Revision Notice". Contracts for difference CfD. 31 July 2024. Retrieved 13 August 2024.
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  37. 1 2 Tisheva, Plamena (3 September 2024). "UK awards 9.6 GW of CfDs in sixth renewables auction" . Retrieved 3 September 2024.
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