Contracts for Difference

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.

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/Technology 2014/15 2015/16 2016/17 2017/18 2018/19
Pot 1 (established)
Onshore Wind (>5 MW) 95 95 95 90 90
Solar photovoltaic (>5 MW) 120 120 115 110 100
Energy from Waste (with CHP) 80 80 80 80 80
Hydro (>5 MW and <50 MW) 100 100 100 100 100
Landfill gas 55 55 55 55 55
Sewage gas 75 75 75 75 75
Pot 2 (less established)
Offshore wind 155 155 1560 140 140
Tidal stream 305 305 305 305 305
Wave 305 305 305 305 305
Advanced Conversion Technologies (with or without CHP) 155 155 150 140 140
Anaerobic digestion (with or without CHP) (>5 MW) 150 150 150 140 140
Dedicated biomass (with CHP) 125 125 125 125 125
Geothermal (with or without CHP) 145 145 145 140 140
Pot 3
Biomass conversion 105 105 105 105 105
Results for AR1 by technology and delivery year [5]
Pot/Technology Capacity (MW) № of

projects

Strike Price (£2012/MWh)
2015/16 2016/17 2017/18 2018/19 2015/16 2016/17 2017/18 2018/19
Pot 1 (established)
Onshore Wind (>5 MW) — 45 77.5 626.05 15 — 79.23 79.99 82.50
Solar photovoltaic (>5 MW) 32.88 38.67 — — 5 50.00 79.23 — —
Energy from Waste (with CHP) — — — 94.75 2 — — — 80.00
Pot 2 (less established)
Offshore wind — — 714 448 2 — — 119.89 114.39
Advanced Conversion Technologies — — 36 26 3 — — 119.89 114.39
Total 32.88 83.67 827.50 1194.80 27 — — — —

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/Technology ASP (£2012/MWh) Capacity (MW) № of

projects

SP (£2012/MWh)
2021/22 2022/23 2021/22 2022/23 2021/22 2022/23
Pot 2 (less established)
Offshore wind 105 100 860 2336 3 74.75 57.50
ACT (standard or advanced; with or without CHP) 125 115 56.31 8 6 74.75 40.00
Anaerobic digestion (with or without CHP; >5MW) 140 135 — — — — —
Dedicated biomass (with CHP) 115 115 85.64 — 2 74.75 —
Wave 310 300 — — — — —
Tidal stream 300 295 — — — — —
Total — — 1001.95 2344 11 — —

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/Technology ASP (£2012/MWh) Capacity (MW) № of

projects

SP (£2012/MWh)
2023/24 2024/25 2023/24 2024/25 2023/24 2024/25
Pot 2 (less established)
Advanced Conversion Technologies 113 111 27.5 6.1 2 39.65 41.611
Anaerobic digestion (>5 MW) 122 121 — — — — —
Dedicated biomass with CHP 121 121 — — — — —
Geothermal 129 127 — — — — —
Offshore wind 56 53 1212 2854 6 39.65 41.611
Remote island wind (>5 MW) 82 82 225.72 49.5 4 39.65 41.611
Tidal stream 225 217 — — — — —
Wave 281 268 — — — — —
Total — — 2865.22 2909.6 12 — —

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/Technology ASP (£2012/MWh) Capacity (MW) № of

projects

SP (£2012/MWh)
All delivery years 2023/24 2024/25 2025/26 2026/27 2023/24 2024/25 2025/26 2026/27
Pot 1 (established)
Solar PV (>5 MW) 47 251.38 1958.03 — — 66 45.99 45.99 — —
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 stream 211 — — 5.62 35.2 4 — — 178.54 178.54
Floating offshore wind 122 — — — 32 1 — — — 87.30
Remote Island Wind (RIW) 62 — — — 597.6 6 — — — 46.39
Offshore Wind 46 — — — 6994.34 5 — — — 37.35
Total — 251.38 2875.99 5.62 7659.14 93 — — — —

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/Technology ASP (£2012/MWh) Capacity (MW) № of

projects

SP (£2012/MWh)
All delivery years 2025/26 2026/27 2027/28 All delivery years
Pot 1 (established)
Energy from waste (with CHP) 116 — — — — —
Hydro (>5MW and <50MW) 89 — — — — —
Landfill gas 62 — — — — —
Offshore wind 44 — — — — —
Onshore wind (>5 MW) 53 31.1 204.4 1245.24 24 52.29
Remote island wind (>5 MW)) 53 — — 223.6 1 52.29
Sewage gas 148 — — — — —
Solar PV (>5 MW) 47 393.96 150.74 1382.98 56 47.00
Pot 2 (less established)
Advanced Conversion Technologies 182 — — — — —
Anaerobic digestion (>5 MW) 136 — — — — —
Dedicated biomass with CHP 162 — — — — —
Floating offshore wind 116 — — — — —
Geothermal 119 — 7 5 3 119.00
Tidal stream 202 — 4.5 48.54 11 198.00
Wave 245 — — — — —
Total — 425.06 366.64 2905.36 95 —

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]

  • Pot 1 for established technologies, initially £120m, increased to £185m,
  • Pot 2 for emerging technologies, initially £105m, increased to £270m (again including a ringfence for tidal stream, of £10m then £15m)
  • Pot 3 for offshore wind, initially £800m, increased to £1.1bn.

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/Technology ASP (£2012/MWh) Capacity (MW) № of

projects

SP (£2012/MWh)
All delivery years 2026/27 2027/28 2018/29 All delivery years
Pot 1 (established)
Energy from waste (with CHP) 181 — — — — —
Hydro (>5MW and <50MW) 102 — — — — —
Landfill gas 69 — — — — —
Onshore wind (>5 MW) 64 272.58 717.79 — 22 50.90
Remote island wind (>5 MW)) 64 — — — — —
Sewage gas 162 — — — — —
Solar PV (>5 MW) 61 1091.54 2196.77 — 93 50.07
Pot 2 (less established)
Advanced Conversion Technologies 210 — — — — —
Anaerobic digestion (>5 MW) 144 — — — — —
Dedicated biomass with CHP 179 — — — — —
Floating offshore wind 176 — — 400 1 139.93
Geothermal 157 — — — — —
Tidal stream 261 — 10 18 6 172.00
Wave 257 — — — — —
Pot 3 (offshore wind)
Offshore wind 73 — — 3363.07 2 58.87
Offshore wind permitted reduction* n/a — 1578.51 — 7 54.23
Total — 1364.12 4503.07 3781.07 131 —

* 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)
Round Nuclear Solar PV Onshore wind Remote island wind Offshore wind Floating offshore wind Tidal Stream Biomass conversion Dedicated biomass with CHP Energy from waste with CHP Advanced Conversion Technology Geothermal Total
Pre-AR1 3277 — — n/a 3101 — — 1052 299 — — — 7729
AR1 n/a 72 749 n/a 1162 — — n/a — 95 62 — 2140
AR2 n/a n/a n/a n/a 3196 — — n/a 86 — 64 — 3346
AR3 n/a — — 275 5466 — — n/a — — 34 — 5775
AR4 n/a 2209 888 598 6994 32 41 n/a — 30 — — 10792
AR5 n/a 1928 1481 224 — — 53 n/a — — — 12 3698
AR6 n/a 3288 990 — 3363 400 28 — — — — — 9648
Total 3277 7497 4108 1096 23282 432 122 1052 385 125 160 12 43127

See also

References

  1. ^ a b c Watson, Nicole; Bolton, Paul (17 October 2023). Contracts for Difference Scheme (Report). House of Commons Library. Retrieved 5 May 2024.
  2. ^ Hinson, Suzanna; Bolton, Paul (8 April 2020). Support for low carbon power (Report). House of Commons Library. Retrieved 5 May 2024.
  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.
  5. ^ a b c McNaught, Colin. "MAJOR CHANGES FOR THE RENEWABLE ELECTRICITY MARKET: A FOCUS ON UK CONTRACTS FOR DIFFERENCE (CFD)". The Renewable Energy Institute. Retrieved 6 May 2024.
  6. ^ a b "Final Investment Decision Enabling for Renewables: Updates 1, 2 and 3". GOV.UK. 24 April 2014. Retrieved 5 May 2024.
  7. ^ "FID Enabling for Renewables. Successful Projects offered an investment contract" (PDF). GOV.UK. 23 April 2014. Retrieved 5 May 2024.
  8. ^ "UK nuclear power plant gets go-ahead". BBC News. 20 October 2013. Retrieved 5 May 2024.
  9. ^ "Key Updates for CfD Allocation Round 7 - Renewable Exchange". 22 October 2024. Retrieved 21 December 2024.
  10. ^ "Key takeaways from the government's response | Amending CfDs for AR7 and beyond | Clean Energy, Waste & Sustainability | Freeths". www.freeths.co.uk. 22 October 2024. Retrieved 21 December 2024.
  11. ^ "Clean Power 2030 Action Plan". GOV.UK. 13 December 2024. Retrieved 21 December 2024.
  12. ^ "The Clean Industry Bonus - all you need to know". Opergy Group. 13 November 2024. Retrieved 21 December 2024.
  13. ^ "Contracts for Difference (CfD) Allocation Round 7: Clean Industry Bonus framework and guidance". GOV.UK. 5 December 2024. Retrieved 21 December 2024.
  14. ^ "Contracts for Difference (CfD): first allocation round". GOV.UK. 26 February 2015. Retrieved 5 May 2024.
  15. ^ "Contracts for Difference (CFD) Allocation Round One Outcome" (PDF). GOV.UK. 26 February 2015. Retrieved 5 May 2024.
  16. ^ "Contracts for Difference (CFD) Second Allocation Round Results". GOV.UK. 11 September 2017. Retrieved 5 May 2024.
  17. ^ Marsh, Rob; Berry, Mark. "Contract for Difference in Great Britain: The offshore wind round? | United Kingdom | Global law firm | Norton Rose Fulbright". www.nortonrosefulbright.com. Retrieved 5 May 2024.
  18. ^ a b "Contracts for Difference (CFD) Second Allocation Round Results". GOV.UK. Retrieved 5 May 2024.
  19. ^ "Contracts for Difference: An explanation of the methodology used to set administrative CFD strike prices for the next CFD allocation round". GOV.UK. Retrieved 5 May 2024.
  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.
  22. ^ "Methodology used to set administrative strike prices for CfD Allocation Round 3". GOV.UK. Retrieved 6 May 2024.
  23. ^ "Contracts for Difference (CfD) Allocation Round 3: results - published 20 September 2019, revised 11 October 2019". GOV.UK. Retrieved 7 May 2024.
  24. ^ Dykes, Andrew (24 November 2021). "UK Government announces £20m ring-fenced tidal funding in upcoming CfD". Energy Voice. Retrieved 6 May 2024.
  25. ^ Garanovic, Amir (7 July 2022). "UK's fourth contracts for difference round awards over 40MW of new tidal power capacity". Offshore Energy. Retrieved 7 May 2024.
  26. ^ "Hexicon's TwinHub Wins First First-ever Dedicated CfD for Floating Wind in UK". Offshore Engineer Magazine. 7 July 2022. Retrieved 7 May 2024.
  27. ^ "Contracts for Difference (CfD) Allocation Round 4: results (accessible webpage)". GOV.UK. Retrieved 6 May 2024.
  28. ^ "Contracts for Difference (CfD) Allocation Round 5: statutory notices". GOV.UK. 3 August 2023. Retrieved 7 May 2024.
  29. ^ Millman, Grace (8 September 2023). "AR5: Urgent government response needed to rebuild leadership in UK offshore wind - Regen". Retrieved 7 May 2024.
  30. ^ "Contracts for Difference (CfD) Allocation Round 5: core parameters". GOV.UK. Retrieved 7 May 2024.
  31. ^ "Contracts for Difference (CfD) Allocation Round 5: results (accessible webpage)". GOV.UK. Retrieved 7 May 2024.
  32. ^ "Energy UK explains: how much renewable energy can we expect from Allocation Round 6?". Energy UK. 6 March 2024. Retrieved 5 May 2024.
  33. ^ a b c "Contracts for Difference (CfD): Budget Notice for the sixth Allocation Round, 2024" (PDF). GOV.UK. 6 March 2024. Retrieved 8 May 2024.
  34. ^ "Upcoming renewables auction boosted 50 per cent to £1.5bn". The Engineer. 31 July 2024. Retrieved 13 August 2024.
  35. ^ "AR6 Budget Revision Notice". Contracts for difference CfD. 31 July 2024. Retrieved 13 August 2024.
  36. ^ a b "Contracts for Difference (CfD) Allocation Round 6: results". GOV.UK. Retrieved 3 September 2024.
  37. ^ a b Tisheva, Plamena (3 September 2024). "UK awards 9.6 GW of CfDs in sixth renewables auction". Retrieved 3 September 2024.

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