The Government have today published key details of next year’s contracts for difference allocation round, Great Britain’s flagship renewables auction scheme. This announcement cements the UK as a world leader in renewables, particularly against the backdrop of recent economic challenges for the sector globally.
In the first quarter of this year, 48% of our power came from renewables, up from just 6% in the first quarter of 2010. Our contracts for difference allocation rounds are a British success story and since 2014, contracts have been awarded totalling around 30 GW of new renewable capacity across all technologies, including onshore wind, offshore wind, solar, geothermal, and tidal energy. This has improved, and continues to improve, our energy security by moving away from imported fossil fuels. And it is protecting consumers by ensuring they do not pay higher support costs during periods of high electricity prices, which are driven by volatility in international fossil fuel markets.
The UK is home to the world’s largest operational offshore wind farm project, Hornsea Two (1.4 GW) which became fully operational in August 2022. As of October 2023, the UK is also home to the second, third, fourth and fifth largest operational offshore wind farm projects in the world, all thanks to our leading contracts for difference model.
Allocation round 5 was a success for many technologies, including marine energy and, for the first time, three geothermal projects. But we recognise the shortfall in fixed and floating offshore wind. We have reviewed the design of allocation round 6 to ensure the scheme continues to encourage competitive and sustainable outcomes, driving benefits for industry and consumers.
We have seen global challenges over the last year, posed by inflation in production costs across the economy, impacting technologies from renewables to gas to nuclear. The Government have today published key details of the sixth contracts for difference allocation round, opening in March next year. In light of the global volatility for the offshore wind sector, we have comprehensively reviewed our evidence base, which has informed today’s announcement, and also engaged with industry to benchmark our analysis. Today’s updates, therefore, set out an uplift to the administrative strike prices and that allocation round 6 will feature three pots.
The administrative strike prices are the auction ceiling prices for each technology. Reflecting on last year’s auction and in light of inflationary pressures in the supply chains, these have been increased, and are intended to balance participation in the auction with ensuring good value to bill payers. The actual price projects will receive will be set by the competitive auction. We recognise this will also be an important round for supply chain companies, and the new administrative strike prices reflect the need to support a sustainable supply chain, including companies who have recently made investments in new manufacturing facilities here in the UK.
Considering the strength of the offshore wind pipeline, we are announcing that allocation round 6 will feature three auction pots, with offshore wind in its own auction pot. A three-pot structure will drive support across Britain’s diverse portfolio of renewable technologies and help the UK deliver on its ambition of up to 50 GW of offshore wind by 2030, including up to 5 GW of floating offshore wind. Other documents related to allocation round 6 published today include the draft “Allocation Framework”—the rules and eligibility requirements for the 2024 round—and the “Administrative Strike Price Methodology”, a document explaining how the administrative strike prices are determined.
A route to lower bills
Macroeconomic conditions are placing upward pressure on costs for all electricity generating technologies. The Department will be publishing updated analysis comparing the cost of electricity generation across renewable and non-renewable technologies by the end of March 2024, reflecting the latest evidence, including on global market shifts. Existing analysis shows that renewables form the bedrock of a low-cost energy electricity system. This is in line with the conclusions from the Office for Budget Responsibility’s “enhanced levelised cost” analysis from 2023.1
Last year, volatile global gas prices drove electricity prices to record highs many times greater than the administrative strike prices set out today. This led to the Government stepping in and paying around half of people’s energy bills last year. It also saw renewable generation paying back hundreds of millions into the contracts for difference, reducing the amount needed to deliver our energy support schemes. Going forward, we agree with the Climate Change Committee that oil and gas will remain an important part of our overall energy mix when we reach net zero by 2050. However, our reliance on gas for electricity production today risks making power prices higher than they would be in a system with a greater share of generation from wind and solar. We must therefore continue to reduce our reliance on gas for electricity production in a way that maintains energy security. Moving to home-based, clean power mitigates risks to bill payers, now and in the future.
Driving our renewable energy manufacturing industry
The contracts for difference scheme has been successful in driving down the price of renewable energy deployment, but this has presented challenges for sustainable renewable energy supply chains in competing for business, particularly as they have been struggling under difficult market conditions since the covid-19 pandemic and Russia’s invasion of Ukraine. I am therefore also publishing a consultation today on the introduction of new sustainable industry rewards into the allocation round from 2025, which will provide additional funding through the contracts for difference to support projects that invest in more sustainable supply chains.
The core parameters published today demonstrate we are investing in our booming renewables sector. We are backing our world-leading offshore wind sector, delivering enough offshore wind to power the equivalent of every home in Britain by 2030. I am committed to a successful allocation round 6, which drives value for money for consumers. This will also be important in helping achieve energy security, decarbonising our power system by 2035, and hitting our net zero targets by 2050.
1 Office for Budget Responsibility, Fiscal Risks and Sustainability, July 2023, pp.82-3: https://obr.uk/frs/fiscal-risks-and-sustainability-july-2023