Last month, the Department for Energy Security and Net Zero (DESNZ) announced the outcome of the latest Contracts for Difference (CfD) Allocation Round 6 (AR6).
This programme helps deliver low-cost renewable electricity and is an important driver in helping decarbonise our economy.
Onshore wind achieved the second-lowest strike price of £50.90 per megawatt-hour, just behind solar at £50.07 and ahead of offshore wind which secured £58.87. For comparison, the CfD for nuclear power station Hinkley Point C has a strike price of £92.50 guaranteed for 35 years.
To compare with gas, for which there is no CfD, it is useful to consider the Levelised Cost of Electricity (LCOE) which is the discounted lifetime cost of building and operating a generation asset. It covers all relevant costs faced by the generator, including pre-development, capital, operating, fuel, and financing costs. The main intention of a levelised cost metric is to provide a simple “rule of thumb” comparison between different types of generating technologies. The latest estimated LCOE predicts that gas will cost £114 per megawatt-hour in 20251; in comparison, onshore wind is predicted to have an LCOE of only £38/MWh, thus demonstrating that renewables continue to be the cheapest form of new electricity generation for consumers.
CfDs were first introduced in 2014 and aim to support the development of new renewables through a fixed price for the electricity generated by a project. Developers bid for CfD contracts in a competitive auction and the projects with the lowest ‘strike prices’ are successful. If the wholesale electricity market price is lower than the developers ‘strike price’ when the developer comes to sell their electricity, then the developer is ‘topped up’ by the Government-owned Low Carbon Contracts Company (LCCC); if the opposite occurs then the developer ‘pays back’ the difference to the LCCC. In recent years projects have paid back to the consumer and it has been estimated that by 2027 CfD supported renewables could pay back £10.49 billion a year to customers, leading to each household saving £97.53 per year2.
The latest CfD round has been successful in bringing forward 131 solar, tidal, onshore and offshore projects being awarded contracts – making it the biggest CfD round yet. These awards come just a couple of months after the Government confirmed its launch of Great British Energy in the King’s Speech, which we now know will be headquartered in Aberdeen.
The CfD is not the only route to market for renewable energy projects. RES develops projects including its’ 16-turbine 105.6MW Hill of Fare Wind Farm near Banchory, to be successful via merchant market, that capture the wholesale prices, with no support from government. Additionally, Corporate Power Purchase Agreements (CPPAs) where a developer agrees a fixed price for the electricity generated with a corporate user is another route to market for projects. This multi-market approach is crucial to ensure we achieve the scale required to decarbonise our economy.
If consented, Hill of Fare Wind Farm will join the many onshore projects across Scotland and the UK which are helping to generate clean, low-cost renewable electricity and achieve net zero carbon emissions targets. The project is predicted to deliver a £150m boost for the local economy, including more than 230 construction jobs, and reduce the equivalent of 69,000 tonnes of carbon emissions each year.
1 Electricity Generation Costs 2023 (https://assets.publishing.service.gov.uk/media/6556027d046ed400148b99fe/electricity-generation-costs-2023.pdf
2Renewed Importance: How Investing in Renewables Cuts Energy Bills (www.ukonward.com