Allocation Round 6 (AR6) resulted in the allocation of Contracts for Difference (CfDs) to a record 131 projects. The total capacity awarded contracts was 9.6GW, below the record capacity of 10.8GW achieved in AR4. The sectors securing CfDs included 4.9GW for offshore wind, 3.3GW for solar PV, 1GW for onshore wind, 400MW for floating offshore, and 28MW for tidal stream. But what are the implications for the road to net zero?
Development of mixed economy
The budget was underspent while the auction was oversubscribed. This means that there were projects whose bid price was too high to secure a CfD because the amount of budget required to fund them would have breached the budget. Developers of those projects can either:
- Decide to re-bid in AR7
- Proceed to final investment decision without the benefit of a CfD, or
- Abandon the project
A number will no doubt decide to re-bid in AR7. What will be interesting is the number that decide to proceed to final investment decision without a CfD. Some may do so on the basis of a corporate PPA. Some may decide to take power price risk, and hedge on a periodic basis. PPA providers may develop products to facilitate such an approach. We expect a 'mixed economy' to develop – CfD backed projects, corporate PPA backed projects and some investors taking and managing power price risk.
Ultimately, though, a mixed economy is only viable if CfD policy supports a viable market price – if CfDs as currently designed support substantially all generation, power prices will tend to fall (and CfD support payments will increase) stifling investment in projects without a CfD. If CfD design is refined to reduce the incentive to produce irrespective of the market price, and allocation policy reflects a desire to see a mixed economy, we may see a more varied and established mixed economy in the future.
Meeting the new targets
The results show the scale of the challenge the new government has decided to take on. It has set out its objective to achieve a net zero electricity sector by 2030, brought forward from the previous government's target of 2035. The government supplemented that target by upping the offshore wind target from 50GW by 2030 to 60W (55GW fixed and 5GW floating). Energy UK concluded in July that meeting the fixed 55GW target would require 26GW to be allocated over AR6 and AR7. In total, therefore, around 31GW (oil & gas may fund some floating without a CfD) to meet the combined fixed and floating target of 60GW. The results of AR6 mean that 26GW is theoretically required to be allocated in AR7.
It may be possible to stretch the auctions that can support the 2030 target to AR8 in 2026, especially if the auction can be brought forward to allocate projects earlier in that year, and you can stretch the target to the last day of 2030, not something politicians are averse to doing. Even so, that's a huge amount of capacity to be allocated CfDs.
The government increased the budget for AR6 by 50% or so. Yet, AR6 only procured a fraction of the capacity needed to meet the government's own target. While AR7 prices may come in a bit lower than AR6, the AR6 strike prices imply the government will need to offer a much higher budget for AR7 if it is to meet its own target. Will it be prepared to do that?
Even assuming it does, it means that a huge amount of capacity will need to be built in a very short space of time in a market where many countries will be competing for the same supply chain resource. Will the UK ports be able to service that demand in time? Or would it mean more overseas ports being used, resulting in lower overall investment in UK ports? Can the required grid infrastructure be built in time to avoid a spike in constraint payments? The extent of this ambition will provide confidence to the industry and investment community, but perhaps some realism, and a more strategic approach to building delivery capacity for the challenge ahead, would not go amiss.
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