Procure Smart

What is the Contracts for Difference (CfD) auction and why has it been a “disaster” in 2023?

Beginning life in 2014 as one of the government’s flagship renewable energy development incentives, the Contracts for Difference (CfD) auction provides funding to support the development of renewable capacity installations in the UK.

The CfD budget is set by the government and developers bid to sell energy to the grid, which has been generated by solar, wind, biomass and other new developments they promise to invest in.

Successful bidding developers win contracts for energy by offering it at the lowest price possible, but still above market value.  This provides the project a guaranteed revenue stream to cement its viability for investors and financiers.

The tricky part for developers is bidding at a low enough price to win the contract, whilst bidding high enough to generate strong enough revenue to deliver the project.

Why was there no offshore wind awarded in this year’s CfD?

Several reasons contributed to there being no offshore wind contracts awarded.  The Department for Energy Security and Net Zero suggested that the result was due to global inflation and its impact on supply chains and project costs.

Meanwhile, renewable campaigners such as Britain Remade and project developers have argued that the government’s reduced cap of £44 per megawatt hour (MWh) on wind bids made projects a non-starter.  By comparison, the previous round’s cap was set at £46.  Both of these figures are stated in 2012 terms, as per the auction, with inflation meaning actual prices are higher.

Why is this year’s CfD auction result receiving such criticism?

The gas price crisis and Ukraine war have put the UK’s energy security under the microscope.  As a net importer, the UK is vulnerable to global wholesale market volatility.  Generating a higher proportion of our own energy is seen as a vital strategic goal.  But the journey to net zero means this must be done via growth in renewable capacity. 

This year’s CfD auction resulted in a drastically reduced award of 3.7 Gigawatts (GW) of new projects versus last year’s award of 11 GW.  This represents slow progress against a government-set target of 50 GW of offshore wind capacity by 2030.  We currently have 14 GW.

Offshore is a key technology within the UK’s decarbonisation goals and accounted for 7 GW of the 11 GW awarded in 2022.  To have none awarded in 2023 represents underperformance and has become a point for criticism from political opposition.

What does this mean for my business?

Such a macro-level energy development probably feels inconsequential to most business leaders.  Its short-term impacts will be relatively unnoticeable. However, the government’s overarching energy strategy is designed to make the prices delivered more affordable, less volatile and more secure.

If there is insufficient investment in renewable energy according to the plan, it may put upward pressure on delivered prices.  Equally, lower levels of supply security could increase prices due to policy changes and associated outcomes.

The energy price crisis has been a key driver of UK inflation.  Less readily available renewable energy will put upward pressure on residential energy bills and reduce disposable income and consumer spending, which usually has a negative impact on small businesses.

What should my business do?

This development is certainly not something that should spur kneejerk decisions from business leaders.  But the potential impacts explored in this blog are also highly relevant on an individual business level.

Effective financial planning of energy prices and security of supply are key considerations for all businesses.

Renewable energy payback periods are the shortest they have ever been and up-front associated costs are increasingly accessible and avoidable. This makes it an excellent time for businesses to explore the positive impacts renewable installations can have on their bottom line.

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