energysource issue 18 03 Apr 2017 The UK: Offshore wind all the way

In the UK, as in other European jurisdictions, the Government has sought to limit the cost of renewables to consumers.  As a result, the incentives previously available for onshore wind projects have now been withdrawn for new projects.  In contrast, the Government has indicated that it will continue to offer incentives for offshore wind although, as discussed below, it expects the offshore wind industry to make significant savings so that projects can go ahead with much lower rates of support.

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The CfD regime

It is relevant to note that in the UK, the Contracts for Difference (CfD) regime was implemented in 2014 to replace the Renewables Obligation (RO) green certificate scheme (which is closing on 31 March 2017, subject to some grace periods) as the main form of support for low-carbon electricity generation projects in the UK. Under a CfD, the developer is paid a top-up payment above the wholesale price (the reference price), up to the strike price, for a term of 15 years.  The CfD regime contemplates that for most renewable energy technologies, if the number of projects applying for support exceeds the allocated budget, CfD allocation will involve a reverse auction, to achieve the lowest price for electricity consumers.

Even before the new CfD regime was fully implemented, the Government awarded a number of so-called investment contracts — an early form of the CfD contract — to various projects, five of which were offshore wind farm projects.  The award of these investment contracts did not involve an auction, and therefore these projects were awarded support at a strike price set using an administrative process (the "administrative" strike price).  The administrative strike price for delivery years up to 2018/19 was set at a range starting at £155/MHh, reducing to £140/MWh for the latter years.  The first CfD allocation round took place in October 2014 and resulted in two offshore wind farm projects being awarded CfDs at a strike price of £119.89/MWh and £114.39/MWh respectively (which is approximately 20 per cent lower than the "administrative" strike price set for offshore wind in that allocation round).

The CfD allocation rounds were originally intended to take place annually, but until now, no further allocation rounds have been held.  However, in the March 2016 Budget, the Government announced that it would make available up to £730m of CfD funding this Parliament (i.e. before 2020) for up to 4GW of offshore wind and other "less established" renewables technologies, across three separate allocation rounds.

The second CfD allocation round


In November 2016 the Government indicated in a draft budget for the second allocation round that £290m of CfD funding will be available for projects which are planning to commission in the delivery years 2021/22 and 2022/23.  This was confirmed in March 2017, with the publication of the final budget.  The £290m figure does not represent a lump sum covering the cost of the projects over their total CfD term, but rather how much is available to cover payments to the successful projects on an annual basis.  It does not matter whether a project will be commissioned in 2021/22 or 2022/23 — the Government has said that CfDs will be allocated to the cheapest projects first, regardless of their start date, as long as they fit within the budget profile provided.

The established technologies that are eligible to participate in the second allocation round are offshore wind, advanced conversion technologies (ACT) (with or without CHP), anaerobic digestion (with or without CHP), dedicated biomass with CHP, wave, tidal stream and geothermal technologies.  Because of the way the allocation round is being structured — including a proposed "maxima" of 150MW in relation to fuelled technology projects — a large proportion of the budget is expected to be available for offshore wind farm projects.  However, offshore wind farm developers are expected to make significant cost savings.

Figure 1 sets out the administrative strike prices for offshore wind announced in the Government's budget notice.  For comparison, we have also set out the strike price that was originally set for the 2018/2019 delivery year.  These administratively set strike prices represent the maximum strike prices that can be awarded to eligible projects participating in the second allocation round.  If the CfD funding that would be required for all such eligible projects (paid at the administrative strike prices) exceeds the budget available, then a constrained allocation auction will take place, whereby these projects will bid lower strike prices to compete for the available budget.  This is what happened in the first allocation round.

As can be seen from the table, offshore wind projects are expected to be economically viable with the benefit of much lower strike prices, with the support offered being at a much lower level compared to the first allocation round.  Indeed, the Department for Business, Energy and Industrial Strategy previously said that offshore wind farm projects would need to aim to be viable at a strike price support rate of 85/MWh by 2026.  With offshore wind farm projects in various European jurisdictions being awarded ever-lower rates of support, the pressure will be on for UK-based projects to achieve similar savings.

Phased offshore wind farm projects

The Allocation Framework, which sets out the rules for the second CfD allocation round, sets out some restrictions on offshore wind projects which are to be carried out in phases.  In particular, after all phases are completed, the whole offshore wind farm project must have a capacity not greater than 1500 MW, and the first phase must represent at least 25 per cent of the total capacity of the project after all phases are completed.

The application "window"

The application window for projects participating in the second allocation round is 3 April to 21 April 2017, and the whole allocation process is to be completed by 11 September 2017.

Figure 1

Technology CfD Strike Prices (£/MWh, 2012 prices)
(Included here for comparison purposes only)
2021/22  2022/23
Offshore wind 140 105 100

Co-author: Justyna Bremen, Senior Expertise Lawyer

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The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying it to specific issues or transactions.

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