Re-Powering the CfD Regime: Proposed Amendments for Allocation Round 7

Background

The seventh allocation round (“AR7”) for the UK’s contract for difference (“CfD”) auction is due to open for applications in March 2025. In advance of this, the Government has launched a consultation to seek the views of market participants both on specific changes for the AR7 auction as well as on longer-term policy considerations for future allocation rounds. In part, this longer-term planning reflects the reduced time that Government will have to implement policy changes in future as it shifts to more frequent, annual CfD rounds. 

We have previously considered the proposed changes to, and final terms for, the fifth allocation round and sixth allocation round. In this article we will reflect on key changes that will be proposed for AR7 under the Government’s consultation.

Please get in touch if you would like more detail on the legislative and regulatory regimes underpinning AR7 or the UK CfD scheme generally.

A high-level view: proposed changes for AR7

The Government has outlined a number of key proposals on which it is seeking views and evidence to help sculpt the architecture of the CfD scheme for the coming years, in particular to enable it to keep pace with the technological advancements of the renewable energy sector. A short summary of these proposals is below.

Repowering: Current CfD legislation places limits on sites looking to re-power, however, the Government is conscious that full repowering requires the decommissioning and recommissioning of the existing site, incurring similarly high upfront costs to that of a new build. As such, the Government considers there to be a case for intervention via the CfD scheme to better incentivise the full repowering of projects. Initially, the Government is minded to open up the CfD scheme for full repowering projects of only onshore wind via AR7, though it will consider offshore wind projects in future rounds subject to evidence of viability. A number of amendments to the CfD legislation are also being considered in this respect, including allowing developers to forward bid for a CfD in relation to a full re-powering project. Currently, the existing project must be decommissioned before developers can bid for a CfD.

Appeals: The Government is aware that the current appeals process under the CfD regime leads to uncertainty as to when results from the round will be announced because the timeline shifts according to the number of appeals submitted by applicants. In 2023, this process led to a two month delay in the result announcements. A number of solutions have been proposed under the consultation, with the Government’s preferred option being the introduction of a pre-qualification process that would move the qualification checks and appeals process to before the round opens to applications.

Phased CfDs for floating offshore wind: The CfD scheme currently allows fixed-bottom offshore wind projects within the same seabed lease area to be built in up to three phases, where each phase is a party to its own CfD agreement. In the light of the emerging status of the floating offshore wind sector and the greater level of construction risk, the consultation is seeking views on whether the ability to apply for CfD agreements in phases should be extended to floating offshore wind projects.

Co-located generation and hybrid metering: Under previous consultations, developers have indicated a desire to co-locate additional assets with their CfD generation facility (such as battery storage or hydrogen production). The Government is therefore considering a hybrid metering approach, allowing CfD generators to measure their metered output used to calculate CfD difference payments at a sub-balancing mechanism unit level, to help facilitate CfD co-location with other assets. The proposal would apply to all technology types supported by the CfD scheme.

Looking ahead: considerations for future allocation rounds

How can the CfD regime support innovation in floating offshore wind foundation technology?

As previously considered in the consultation for the sixth allocation round, the Government is reviewing the parameters under which a CfD unit is considered to be ‘floating offshore wind’. Under the current definition, novel foundation designs suitable for deep water deployment (but that do not technically float) would not be considered eligible as floating foundations under the CfD. A working group was convened which recommended explicitly defining established offshore wind foundation technologies as those ineligible to compete with emerging technologies and benefit from higher administrative strike prices. The consultation is seeking views on this recommendation.

How could the CfD support delivery of improved coordination of offshore transmission infrastructure?

The Government is revisiting the treatment of offshore transmission infrastructure, a theme previously considered in the fifth allocation round consultation. DESNZ’s emerging view is that multi-purpose interconnectors and Bootstrap connections should be eligible for CfD contracts where they demonstrate good value for money and wider benefits to the energy system. The results of DESNZ’s current analysis will be conveyed as part of the response to this consultation.

Should CfD indexation be updated to better reflect inflation risks?

As a result of commodity price inflation outpacing general inflation in recent years, the Government is gathering evidence on whether indexing strike prices to PPI during the construction phase of a project would better reflect increases in project costs than CPI.

Next Steps

The consultation for AR7 closes on 7 March 2024, following which the Government will publish a response to the consultation reflecting response feedback. If you would like to discuss the changes proposed to the CfD regime in AR7 and beyond, or any other aspects of the regulatory regime underpinning the development of offshore wind in the UK, our market-leading energy team would be happy to assist you.