UK Government update on the introduction of non-price factors into CfD auctions

As we reported previously, in April 2023 the Government launched a call for evidence on the introduction of criteria other than cost for assessment as part of its auction process for Contracts for Difference (“CfD”) for renewable projects. The purpose of introducing non-price factors (“NPFs”) is to incentivise projects and developers to deliver broader value to society and the environment across the wider supply chain, rather than simply rewarding the lowest cost projects.

Consideration of NPFs is becoming more common around the globe. The renewables industry is open to the introduction of NPFs where such criteria are carefully designed, implemented and monitored to ensure sustainable societal and environmental value and transparency whilst enabling the CfD to remain bankable.

In its recently published response, Government has confirmed the feedback with which it agreed and set out points on which it is still considering the next steps for this particular policy. The call for evidence has helped Government narrow down the NPFs which it and the UK renewables industry consider potentially appropriate for valuation under the CfD auction process. Biodiversity, community and planning factors will be dealt with at an earlier stage of project development, for example, but innovation, sustainability, capacity building and skills will continue to be explored for valuation in the CfD and consideration given to how to ensure such factors are objectively measurable. Government has concluded that issues related to system flexibility, operability and locational signals are not best addressed through the CfD at this stage, although it may reconsider this approach depending on the outcome of the REMA process (for more on which, see here). The mechanism for introducing non-price factors into the CfD process still needs to be further explored by Government but some form of top-up to the strike price is considered the most favourable option.

It is clear that there are still concerns about adding complexity to the auction process and how to balance incentivising renewables developers to invest in NPFs while limiting costs to consumers and avoiding overpayment by Government. Government also recognises that there is a challenge around whether incentivising investment in manufacturing capacity and infrastructure at CfD auction stage (some of the systemic challenges which the policy is intended to address) is too late in the supply chain process. Incentives at CfD stage may at least need to be tied in with a wider strategic and more centralised approach.

Any change to the CfD process to introduce NPFs is likely to be made up to two years in advance. Government is also considering in the longer-term whether introducing such criteria at leasing stage for offshore and floating offshore projects would be feasible; there are many in the renewables industry who would consider this approach preferable.

We will continue to monitor developments and provide updates in due course. In the meantime, please get in touch if you would like more detail on the UK CfD scheme and ongoing developments.