‘Too low and too tight’: Clean energy auction budget will discourage investment, sector warns
Trade bodies and analysts urge government to reverse plan to reduce budget allocated for upcoming renewables auction
Concerns are mounting the UK’s upcoming clean power contract auction sends the wrong signal to renewables investors, amid fears the government’s proposed £205m budget is too low given rising inflation and interest rates, supply chain challenges, and labour shortages across the industry.
Renewables trade bodies and analysts have today warned that many wind, solar, and tidal developers might hold back from bidding in this year’s Contract for Difference (CfD) auction round under current proposals, arguing reductions in maximum strike prices being offered by government do not take into account the increased economic pressures facing the market.
CfDs provide clean energy generators with guaranteed prices for the power they generate, with the government offering a subsidy payment if wholesale prices drop below the agreed strike price, but receiving payments from the generator if wholesale prices move above strike prices.
Yesterday the Department for Energy Security and Net Zero confirmed a budget of £205m for this year’s auction, the first to be conducted on an annual basis in a bid to accelerate renewables development in support of the UK’s climate goals.
However, the new funding settlement represents a substantial drop on the £285m budget allocated to last year’s auction round, despite industry warnings that inflationary pressures means developers will struggle to match the bids seen last year.
Michael Chesser, economics and markets manager at trade body RenewableUK warned “the budget and parameters for this year’s CfD auction are currently too low and too tight to unlock all the potential investment in wind, solar and tidal projects the industry can deliver”.
His comments were echoed by Andrew MacNish Porter, policy manager for economics and markets at Scottish Renewables, who said the plans for the next allocation round “fall significantly short” of what would be required to maximise the amount of low-carbon energy delivered through the mechanism. “This means that consumers will face higher bills for longer, and that developers’ ability to invest in local supply chains will be undermined,” he warned.
And Jamie Maule, research analyst at Cornwall Insight, said investors and developers were “rightly worried” about strike price caps set out by the government this week. “After all, if the high cost of capital cannot be compensated for by an increase in the return, the money will simply not be enough for projects to be successful and could act to stifle competition and deter investors and developers from bidding for renewable projects.”
The government has argued the renewables industry has grown rapidly in recent years thanks in large part to the CfD regime, while the introduction of annual auctions means the budget for the scheme needs to be spread across more frequent allocation rounds.
In response to the calls, a spokeperson said: “We are taking significant action to encourage investment in renewable generation, including our renewable energy auctions, which just last year contracted record capacity of almost 11GW of clean energ. This week we confirmed significant financial backing for this years’ auctions, which will be the first of our Contracts for Difference (CfD) round to run annually. This is a valuable signal to the market, introduced in response to calls from industry to run more frequent auctions and is set to bolster further investment into the sector every year.”
However, trade bodies have urged the government to revise the budget for the auction so as to encourage more developers to bid and help ensure emissions, energy security, and clean energy goals are met.
Chesser warned the UK could not afford to be losing out on clean energy investment in the wake of the US Inflation Reduction act and EU’s Net Zero Industry Act, which are offering major new incentives to green technology developers.
“At a time when the US and EU are bending over backwards to offer incentives for renewable energy developers to come to them to build new projects, the UK is sending the wrong investment signals,” he said. “As a result, we risk losing vital opportunities to scale up our supply chains around the UK, denying communities the industrial-scale benefits which our sector offers. We’re also jeopardising our global lead in cutting-edge clean energy technologies like floating wind and tidal stream.”
