By Charlton Bannister, Analysis and Insights Manager at ORE Catapult
Blog updated: 4th August, 2023
The pot sizes and Administrative Strike Prices (ASP) have been released for AR5, and the Contracts for Difference (CfD) application process is now open. The Department for Energy Security and Net Zero (DESNZ) expect bidding results from the CfD application process from July to September this year. The CfD’s are a long term contractual agreement set up by the government to provide low carbon generators with price certainty, for the energy they generate, over the life of the CfD (15 years). These contracts are paid for by the consumer through their energy bills (although due to recent high energy prices consumers have actually been being paid back!).
The auction parameters are set by DESNZ, the most important factors controlled by DESNZ are the budget limit (total allowable spend) and the reference prices (an estimate of the average market price achieved by a technology). Participants enter a bid with a strike price and a capacity (set by the participant). The value of bids made by participants are calculated by the difference between the strike price they bid in at, and reference prices set by DESNZ. In simple terms, the bigger the difference between reference prices and strike prices bid, the higher the value of the bids. Higher value bids mean fewer projects can secure a CfD, and a smaller total capacity will be awarded. This is designed to limit the impact on taxpayers.
The original AR5 had a total budget of £205m, with £170m for Pot 1. This left £35m for Pot 2, of which £10m was set aside exclusively (ringfenced) for Tidal Stream. The new AR5 budget, announced on the 3rd of August 2023 has a total budget of £227m, with £190m for Pot 1. This leaves £37m for Pot 2, of which Tidal Stream is still £10m. Pots are used to separate technologies and avoid competition between these technologies. Technologies have different cost bases, were there only one pot the “cheapest” technology would likely win the full pot. The UK wants to ensure that it has diversity in generation technologies, and that it can support the development of new technologies in the short term, which will become more cost effective in the medium and long term.
For simplicity, the focus of this analysis is: bottom fixed Offshore Wind (Pot 1), Floating Offshore Wind (Pot 2), and Tidal Stream (Pot 2 ringfence).
The analysis reviews the maximum capacity available for these technologies at various strike prices. It assumes that only one technology bids in each pot, and the Strike Price and Capacity are set to use the full pot for that technology. It treats the ringfenced £10m for Tidal Stream as a separate pot. The budget is set for the 5 years of monitoring between 2025-30, and is the same in every year. In every year the budget must not be exceeded. There are different reference prices in each year. In AR5 the lowest reference price is in 2030. Therefore, for ease of calculation, we only calculate the limit for this year.
The graphs below show how much capacity might be expected from each technology (under the pots for the new AR5 Budget), depending on the strike price.
The below table shows, for each of our three chosen energy types, the potential MW of capacity at various strike prices. The highest strike price is set at the Administrative Strike Price (the maximum price developers can bid).
The previous auction (AR4) resulted in nearly 7GW of offshore wind winning CfD support at a record low strike price of £37.75/MWh, against an administrative strike price of £46/MWh (in 2012 terms). To secure that capacity again, developers would need to bid around £32/MWh. However, AR5 is the first in a series of annual CfD auctions, meaning there will be additional opportunities for unsuccessful bidders to secure revenue support each year.
|Tidal Stream||Strike Price (£)||202||110||50|
|Original AR5 Budget||Capacity (MW)||18||39||191|
|New AR5 Budget||Capacity (MW)||18||39||191|
|Offshore Wind||Strike Price (£)||44||36||32|
|Original AR5 Budget||Capacity (MW)||1,910||3,770||7,350|
|New AR5 Budget||Capacity (MW)||2,133||4,211||8,213|
|Floating Offshore Wind||Strike Price (£)||116||70||50|
|Original AR5 Budget||Capacity (MW)||54||113||215|
|New AR5 Budget||Capacity (MW)||58||122||232|