Navigant Research Blog

Surprises in U.K. Renewables Bidding Round

Roberto Rodriguez Labastida — April 15, 2015

The U.K. Department of Energy & Climate Change (DECC) has announced the results of the first competitive Contracts for Difference (CfD) allocation round. CfDs are designed to give investors the confidence and certainty they need to invest in low-carbon electricity generation. The government does this by paying the generator the difference between the cost of investing in a particular low-carbon technology, known as the strike price, and the reference price, or the average market price for electricity. Generators participate in the electricity market, including selling their power, as usual. This means that if the reference price is higher than the strike price, generators must refund the difference.

The DECC assigned 27 contracts, totaling 2.1 GW of capacity, in round one; the government estimates its total spend will be £315 billion ($470 billion in 2012 prices). Wind projects will supply 1,910 MW of capacity, of which 750 MW will be onshore and 1,160 MW will be offshore. These projects, along with the five offshore projects (3,184 MW) that were allocated CfDs in the so-called round zero, underpin Navigant Research’s forecast in our World Wind Energy Market Update 2015 report that the United Kingdom will install 10.6 GW of wind capacity in the next 5 years.

Low-Balling

In addition to the wind capacity, round one winners include two energy-from-waste projects, with associated combined heat and power systems, that total almost 95 MW of capacity. Three additional projects that use biomass gasification technologies have a combined capacity of 62 MW. Finally—and perhaps surprisingly, given the well-known cloudy and windy British weather—five solar plants, with a total capacity of 71 MW, are also included.

The winning strike prices also brought some surprises. On the one hand, low-bidding solar projects outbid onshore wind projects—which are usually considered the cheapest source of renewable energy. The solar projects offered £50 per MWh, or roughly $0.075 per kWh—very close to the current U.K. wholesale electricity price.

On the other hand, the offshore wind winning bids offered £114.39 ($0.169/kWh) and £119.89 ($0.178/kWh). Interestingly, the Danish Energy Agency announced the winner of its 400 MW Horns Rev. 3 offshore wind farm on the same day. The winning bid was 52% lower than those in the United Kingdom were and will run for 3 fewer years.

Storm Clouds 

If these solar projects actually get built, they will put solar costs in the United Kingdom at a similar level to winning bids in regions with excellent solar resources, such as Dubai and Texas. But there are some clouds on the horizon. James Rowe, director with Hadstone Energy (the developer of one of the lowest bidding projects), put this construction in doubt in a pair of LinkedIn posts (“We Got Our CfD … Oh Dear” and “What Went Wrong with the CfD Auction for Solar?”) in which he explored the reasons why the players (including Hadstone) bid so low.

At this point, it’s difficult to measure the level of success or failure of this allocation round. The solar bids at £50 per MWh are unlikely to ever be built. If others, which bid £79.23/MWh, do come online before the end of 2017, it will be the first time that solar in a resource-poor country has outbid onshore wind in a country with good wind resources.

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