The Contracts for Difference (CfD) regime was introduced by the UK government in 2014, and replaced the Renewable Obligation (RO) scheme (except to the extent that RO is still operating for those renewable energy generators that signed up to the scheme before it closed, as the payments are guaranteed for the length of the period agreed under that scheme).

As the Government’s websitei makes clear:

The Contracts for Difference (CfD) scheme is the government’s main mechanism for supporting low-carbon electricity generation.

CfDs incentivise investment in renewable energy by providing developers of projects with high upfront costs and long lifetimes with direct protection from volatile wholesale prices, and they protect consumers from paying increased support costs when electricity prices are high.

Renewable generators located in the UK that meet the eligibility requirements can apply for a CfD by submitting what is a form of ‘sealed bid’. There have been 3 auctions, or allocation rounds, to date, which have seen a range of different renewable technologies competing directly against each other for a contract.

Successful developers of renewable projects enter into a private law contract with the Low Carbon Contracts Company (LCCC), a government-owned company. Developers are paid a flat (indexed) rate for the electricity they produce over a 15-year period; the difference between the ‘strike price’ (a price for electricity reflecting the cost of investing in a particular low carbon technology) and the ‘reference price’ (a measure of the average market price for electricity in the GB market).

Eagle-eyed observers of the BBC’s website may have noticed an articleii written by Roger Harrabin that appeared there on 9th February 2022. It carried the title: “Renewables auctions to be held annually in green energy push”.

In the past, allocation rounds (ARs) for CfDs have been held broadly every two years, with AR1 running from October 2014 to April 2015; AR2 running from March to September 2017); AR3 running from May to September 2019); and AR4 opening to applications on 13th December 2021. And, according to a Business Statementiii issued to Parliament by Kwasi Kwarteng on 9th February 2022, AR5 is to be brought forward to March 2023.

And now, as the BBC tells us:

The government has re-stated its faith in green technologies with a decision that it says will create a steady stream of renewable energy projects.

Energy Secretary Kwasi Kwarteng says renewable power is the best way to shield the UK from volatile gas prices.

He announced that auctions to supply low-carbon electricity will now happen every year, instead of every two.

He says this will bring more certainty to firms planning to invest in wind turbines and solar panels.

The renewables industry is delighted…

I should think it is. This has proved a nice little earner (or, more precisely, rather a big earner) for the industry since its inception. Those who would have you believe that renewables aren’t subsidised should reflect on why there is such delight on the part of “Big Wind”.

One has to hope that a comment made by the Secretary of State towards the end of his Parliamentary Statement is significant, and that somebody is keeping an eye on “the wider system, including total system costs”:

As more renewables are added to the system, we will continue to consider how the scheme could evolve over the longer term to ensure it reflects the impact of renewables on the wider system, including total system costs.

It would be nice to think that, at last, there is a recognition that unreliable and unpredictable renewable energy greatly adds to the “total system costs” and that, better still, those costs are allocated to those responsible for them, namely the renewable energy companies. That would also help to level the playing-field, and ensure that claims about “cheap” renewables are held up to the glare of full publicity of the overall costs implications they have for the wider system.

Press Release

On the other hand, the associated press releaseiv does give cause for some concern. While I appreciate that the whole point of a press release is to obtain publicity and drum up support for a new initiative, I think when we are talking of a Government press release it should be more substantial than the sort of “advertising puff” one might expect of a business, and it should be scrupulously accurate in all that it claims. In this case, I have a concern that Government ministers believe their own publicity.

For instance, it begins like this:

The rollout of low-cost renewable energy in the UK will be accelerated as the government ramps up auctions for its flagship renewables scheme to boost investment and jobs.

That immediately raises a number of controversial questions. By referring to “low-cost renewable energy” it obviously seeks to undermine claims that the expensive and unreliable renewable energy we are increasingly being forced to rely upon is in any way behind the current energy price crisis. In doing so, it conveniently ignores the fact that the early rounds of CfD provided very high prices for renewable energy companies, and that they are generally locked in for 15 years. Thus high costs are baked in (to use a phrase much loved of green lobbyists) to the system until 2030 and beyond, but nobody in Government seems to want to talk about that. As for boosting investment and jobs – where are the jobs? Point them out: if all this is as successful as claimed, it shouldn’t be too difficult.

A little further on we read this:

CfDs are the government’s primary method of supporting renewable energy, driving down the cost of technologies and playing an important role in leveraging £90 billion of private investment by 2030.

Where does that figure of £90 billion come from? It’s an aspiration, but there is no guarantee that it will be achieved. It’s a pity that Government press releases aren’t fact-checked by the BBC’s “misinformation correspondents” or subject to the jurisdiction of the Advertising Standards Agency or Trading Standards-style laws.

Next:

The auction scheme has already proved successful at bringing down the per unit price of offshore wind by around 65% since the first auctions were held – helping the UK become one of the world’s largest generators of wind power.

It is gratifying that costs are coming down, but they are coming down from a very high starting point, and, as mentioned above, they don’t take into account the costs of destabilising the National Grid. Perhaps it wouldn’t be appropriate for a Press Release, but a footnote with a link to a handy website where the actual costs can readily be seen might have been nice.

Here we go again:

In the last allocation round, new contracts were awarded, with the potential for nearly 6GW of further capacity. This is enough to power over 7 million homes at record low prices and could see the creation of thousands of jobs across the UK.

This is just smoke and mirrors, and not worthy of a serious communication. “Potential”, “nearly” and “power over 7 million homes” combine weasel words with something close to active deception. Homes can be said to be “powered” if that power is reliable and constant, which renewably-generated power most certainly isn’t. The Government shouldn’t be using the same sharp advertising tactics of renewable companies. It should be telling its people the clear, straightforward, unadulterated truth. As for “could see the creation of thousands of jobs across the UK” I fear this is wishful thinking. Without firm legal commitments to create long-term well-paid jobs for UK citizens, then this amounts to little more than spin.

Disappointingly, perhaps for want of anything else to say, this paragraph is simply repeated further down the press release.

I don’t know what others feel, but I’m not sure that quotes from business people should appear in a Government press release, but that’s what has happened here, with quotes from Dan McGrail, Chief Executive of RenewableUK and Morag Watson, Director of Policy at Scottish Renewables. It all just feels a little too cosy. As for Morag Watson saying this:

The Contracts for Difference mechanism plays a central role in facilitating that, and increasing the frequency of auctions is essential if we are to tackle climate change.

I am far from convinced that the hubristic claim that “we” can “tackle climate change” should be allowed. With UK emissions representing around 1% of global emissions that are rising, not falling, it is simply wrong, in my opinion, to talk as though “we” can do anything at all about climate change by reducing our emissions. This idea that it’s all down to us and that we can do it is, frankly, ridiculous. The language of all concerned should be moderated to reflect the global reality.

Finally, the press release contains this little gem:

The share of coal free electricity generation in the whole of 2020 increased by 41.9% (5,202 hours) compared to 2019 (3,665 hours).

I wonder why they didn’t mention 2021’s lousy statistics?

Postscript

Perhaps the next CfD ARs should stipulate the exclusion of certain wind turbine manufacturers, unless the story reported by the BBC (Giant wind turbine collapse to be investigatedv) turns out not to be their fault? In fact, why not stipulate that all turbines to be used under any CfDs must be manufactured in the UK using materials also manufactured in the UK? Or would the UK’s expensive energy render low CfD bids unfeasible in that case…?

Endnotes

i https://www.gov.uk/government/publications/contracts-for-difference/contract-for-difference

ii https://www.bbc.co.uk/news/science-environment-60325908

iii https://questions-statements.parliament.uk/written-statements/detail/2022-02-09/hcws600

iv https://www.gov.uk/government/news/government-hits-accelerator-on-low-cost-renewable-power

v https://www.bbc.co.uk/news/uk-wales-60390094

16 Comments

  1. Sceptics have sometimes alleged that the current low strike price CfDs are merely bookmarks, and that the generating company intends to terminate the contract and sell at the market rate. (I am sure the market rate presently exceeds the strike prices that had certain folk gushing about how cheap wind was etc.) The penalty for exit is said to be low, but I don’t know what it is, nor where it is written. I have searched for it in the CfD standard terms and conditions, which runs to over half a thousand pages of almost English, but have had no luck there.

    We may find out when the first company backs out of its commitment to supply at these rock bottom CfDs, if our media dares to report it.

    The standard terms and conditions and generic contract are at this page, if anyone does not have a wall to watch paint drying on: https://www.gov.uk/government/publications/contracts-for-difference-cfd-allocation-round-3-standard-terms-and-conditions

    Liked by 3 people

  2. Jit, thanks also for that very valid and pertinent comment.

    I have heard the same view expressed, and the article took longer to produce than I intended, because I spent many a long hour searching for evidence of the termination provisions in CfDs – long, fruitless, hours as it turned out. Like you, despite trawling the website relevant to CfDs, I simply couldn’t find anything about it. I wonder why that should be? Time, and time alone, will tell how all this works out.

    Like

  3. I have just posted this comment at “Where Did All The Green Jobs Go?”

    cliscep.com/2021/09/08/where-did-all-the-green-jobs-go/#comment-114645

    I’m drawing attention to it on this thread too, because it rather contradicts the Government press release I referred to in this article, with its grandiose claims about “green” jobs. And after all, isn’t the ONS part of the Government, or at least part of the official paraphernalia? The ONS website report is here:

    https://www.ons.gov.uk/economy/environmentalaccounts/bulletins/finalestimates/2020

    [Link to the comment fixed Mark. I put the following duplicate comment into ‘Pending’. — Richard]

    Like

  4. Should anyone be interested in the minutiae of the AR process for CfDs, a look at this website will demonstrate just how bureaucratic and complex and slow the whole process is (at least in terms of AR4):

    https://www.cfdallocationround.uk/longest-timeline

    Perhaps the jobs of the people overseeing the process can be described as “green jobs”. Goodness knows, in view of today’s news about the lack of them, they need to magic some up from somewhere.

    Liked by 1 person

  5. I have always been a tad sceptical of all the green jobs to be created by renewables. You see I was wrongly under the impression that these jobs would be for athletic types needed to shin up the wind turbines for annual inspections. But perusing the Contracts for Difference document provided by Jit: 16 FEB 22 AT 8:43 AM I fully realise the abundance of jobs it will create. Admittedly not the sort of job I would aspire to, or even opt for instead of having my teeth extracted without anaesthetic, but jobs aplenty nevertheless. The document is 542 pages long of which over 60 pages are definitions. Yet one definition is missing. What is Contract for Difference CfD?
    Clearly these are not jobs for Climate Scientists as they do not have clear definitions for anything.

    Click to access AR3-Standard-Terms-and-Conditions.pdf

    Liked by 1 person

  6. The latest CfD Stakeholder Bulletin has been released, and tells us things like this:

    “The non-qualification review assessment window is now open. National Grid ESO will assess any non-qualifying applications that were submitted for review by 25 March 2022.

    National Grid ESO informed all Allocation Round 4 (AR4) applicants of the outcome of their application following the qualification assessment window, which concluded on 25 February 2022.

    Between 28 February and 4 March 2022, any applicants that did not qualify could submit a request for National Grid ESO to review its decision.

    National Grid ESO will review the relevant applications by 25 March 2022.

    Once the non-qualification review assessment window is complete, any decisions that are upheld may be appealed.

    Applicants that remain non-qualifying following National Grid ESO’s determination may submit an appeal to Ofgem for a decision. Requests for appeals should be submitted from 28 March to 1 April 2022.

    If the review finds that all relevant applications qualify for AR4, National Grid ESO will notify applicants whether an auction is required and, if so, invite the submission of sealed bids. This will happen by 5 April 2022 if all applications qualify following the review.”

    Like

  7. The AR4 update has just been issued, as follows:

    “Allocation Round 4 update
    The appeals submission window is now open and will close on 1 April 2022 at 5pm.

    National Grid ESO informed relevant Allocation Round 4 (AR4) applicants of the outcome of their non-qualification review result on 25 March 2022.

    Applicants that remain non-qualifying following National Grid ESO’s determination may submit an appeal to Ofgem for reconsideration. Requests for appeals may be submitted from 28 March to 1 April 2022.

    If any appeals are submitted during this window, Ofgem will consider them between 12 April and 12 May 2022.”

    Like

  8. I could have posted this under Greenhouse Gassing (since it’s a conference organised by the people I wrote about there), but since it’s about CfDs, I’ll leave it here:

    “Next steps for the Contracts for Difference Scheme – Innovation across renewables, Supply Chain Plans, and assessing the future market outlook

    Morning, Friday, 15th July 2022”

    Areas of discussion include:

    Allocation Round 4 – what has been learned – what can be applied going forward
    Holistic Network Design – scope – development priorities for offshore wind projects
    supply chains resilience – improving Supply Chain Plans – efficiency – infrastructure priorities – commercialising emerging technologies
    market reform and development – outlook – balancing competition and accessibility – reducing costs of technology – support for rapid and sustainable low carbon scale-up
    role in wider policy ambitions – energy security and costs – net-zero objectives – increasing home-grown supply – reducing exposure to volatile international markets

    Like

  9. Another technical update to the CfD allocation programme:

    This one runs to 69 pages:

    Click to access CMP308%20Decision_0.pdf

    This is the short version:

    “Ofgem has announced today that from 1 April 2023 generators will no longer pay Balancing Services Use of System (BSUoS) charges.

    The announcement follows the outcome of a consultation that sought views on proposed changes to the way the charges are collected from electricity network users.

    Ofgem will implement the decision by modifying the Connection and Use of System Code (code modification CMP308).

    For successful projects in Allocation Round 4 (AR4) that would otherwise have been liable to pay the charges, today’s announcement means that their strike prices will be adjusted downwards after contracts are awarded. The adjustment will be applied from 1 April 2023 to coincide with Ofgem’s decision taking effect.”

    Like

  10. Paul Homewood has already posted this in full at his place, and I’ll provide a link to his website below, but the direct link to the original story is here:

    https://www.gbnews.uk/news/wind-farms-earn-hundreds-of-millions-more-from-energy-crisis-after-delaying-government-subsidy-contract/285252

    And at Paul’s place:

    https://notalotofpeopleknowthat.wordpress.com/2022/05/02/wind-farms-earn-hundreds-of-millions-more-from-energy-crisis-after-delaying-government-subsidy-contract/

    It’s relevant here, given that part of the discussion has been about how loosely CfDs are drafted, and how easy (or otherwise) it is for the commercial partners (the energy companies) not to honour their terms in full or at all. This story casts a little light on that, and the story it tells isn’t good.

    Like

  11. Latest update regarding CfD AR4:

    https://www.cfdallocationround.uk/news/allocation-round-4-update-appeals-process-completed

    Also:

    “Webinar: Initial Conditions Precedent
    • Date: Thursday 7 July 2022, 10.00am–11.00am
    Join the Low Carbon Contracts Company (LCCC) for this webinar on the Initial Conditions
    Precedent (ICP) process in AR4.
    LCCC is the Contracts for Difference (CfD) counterparty and one of the four CfD delivery partners.
    In this webinar, LCCC will provide guidance on the ICP, the first contractual requirements after
    signing a CfD. This webinar is therefore particularly relevant for AR4 applicants.
    The webinar will take attendees through the three components of the process – Legal Opinion,
    Know Your Customer and Facility Description – and provide an opportunity to ask questions”

    Like

  12. Don’t they keep telling us that Contracts for Difference are driving down costs and saving us money? Strange, then, that the latest update for AR4 says this:

    “From: Secretary of State for Business, Energy and Industrial Strategy
    To: National Grid Electricity System Operator Limited, EMR Delivery Body
    This notice is given pursuant to Regulation 12 of the Contracts for Difference (Allocation) Regulations 2014
    (as amended). A copy of that regulation is included in Schedule 2 to this notice.
    This notice applies to the fourth Contracts for Difference (CfD) Allocation Round, as established by the
    allocation round notice given by the Secretary of State on 25 November 2021.
    CfD Budget
    1. The Budget for CfD Allocation Round 4 (as set out in the Budget Notice given by the Secretary of State
    on 25 November 2021) is revised as follows-
    (a) The overall budget available for the Delivery Years, 2025/26 and 2026/27, and for the Valuation
    Years 2027/28 and 2028/29, is increased by £10m for each of these years;
    (b) The budget increase described in (a) applies only to the Pot 3 budget, so that the budget for Pot
    3 for the Delivery Years, 2025/26 and 2026/27, and for the Valuation Years 2027/28 and
    2028/29, is increased by £10m to £210m for each of these years.”

    Click to access cfd4-allocation-budget-revision-notice.pdf

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.