CfD Auction Design Changes Come with GBP 1.5 Billion Price Tag

The 2017 Contracts for Difference (CfD) will cost UK consumers significantly more relative to the additional capacity secured due to the changes in the auction design which allowed small fuelled-technology projects to raise the strike price of larger projects, National Audit Office (NAO) has found.

The changes made by the UK Department for Business, Energy & Industrial Strategy (BEIS) to the 2017 auction design have resulted in a total additional cost of around GBP 1.5 billion for the consumers over the 15-year life of the contracts, a report by NAO said.

Almost all of this cost increase is due to small projects pulling up strike prices for projects that had already been accepted, rather than due to additional capacity being secured, the report stated.

In September 2017, BEIS awarded 11 CfDs to projects with a total capacity of 3.3GW, some 3.2GW of which was for three offshore wind projects.

Two of these projects, the 1,386MW Hornsea Project Two off England, and the 950MW Moray Offshore Windfarm (East), are expected to begin generating electricity in 2022-23 and will receive a strike price of GBP 57.50 per MWh. The third project, the 860MW Triton Knoll, is expected to begin generating electricity a year earlier, receiving a strike price of GBP 74.75/MWh.

The eight other CfDs in the 2017 auction were awarded to smaller fuelled-technology projects. This includes biomass with combined heat and power, and advanced conversion technology (ACT) projects.

For the 2017 auction, BEIS decided to cap the amount of generating capacity that projects using certain technologies could be awarded, and adjusted the way this cap would apply compared with the previous auction rules. These changes meant that some projects that were too large to fit within the capacity cap did not win contracts, while some projects that were smaller but more expensive per unit of electricity did win contracts, according to the report.

BEIS has made the design change on the expectation that wind projects would bid at a higher price than fuelled-technology projects, according to the report. If this had transpired, the small fuelled-technologies projects able to win contracts because of the rule changes would not have pulled up the strike price for offshore wind projects, which would have reduced, but not eliminated, additional costs.

The department has recognised that this means the outcome of the auction was suboptimal and has stated it will not apply the capacity cap rule in the same form in future auctions, NAO said.