The administrative strike price for the sixth CfD allocation round will rise by 30 percent for solar power next year, from £47 per megawatt-hour to £61/MWh. This should deliver attractive rates of return for both the Treasury and developers. An auction process may lower the final strike price, to be set by auction.
The cap for onshore wind went up 66 percent from £44 to £73/MWh, with less established floating onshore wind rising 52 percent, from £116 to £176/MWh. In the last round, no bids were made as the strike price was set uneconomically low, putting grid decarbonisation targets at risk. The increase should therefore rebalance and restore confidence in the CfD regime.
While the rises are significant, renewable energy still offers far better value than investing in convention fossil-fuelled generation, not to mention offering substantial climate benefits. The costs of renewable energy have fallen sharply over the past decade and are vastly lower than that of building and operating combined cycle gas turbine generation.
“The Contracts for Difference system has been a major factor in the growth of the UK’s solar power sector by providing investors with a secure and reliable income” said Solar Energy UK Chief Executive Chris Hewett. “Solar remains the cheapest source of power in the UK, according to the Government’s own figures, although lately installation costs have been affected by factors outside the control of the industry, notably the war in Ukraine. So it is gratifying that that the maximum bid price has been raised by a significant amount, which should bolster growth further towards reaching the capacity target of 70 GW by 2035.”
CfDs provide a guaranteed income for renewable energy assets, whatever happens to the wholesale cost of electricity. If the wholesale cost falls below the strike price, the Government pays the difference. If the wholesale cost is greater, then winning firms must pay the difference.
As wholesale costs have been elevated for some time due to the energy price crisis, assets under CfDs will have being paying significant sums to the Government.
Applications are scheduled to open on 27 March 2024, the winners to be made public in the late summer or autumn. Alternatively, solar developers may seek a route to market through corporate power purchase agreements or through operating as merchant plants – risker, though potentially more financially rewarding.
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