Government explores major reform to flagship renewables scheme to improve energy security and drive investment

A major reform to the government’s flagship renewables scheme that could help drive further investment in renewable energy deployment and improve energy security is being explored in plans set out on Monday 17 April.

The Contracts for Difference (CfD) scheme is the government’s mechanism for supporting new British low-carbon electricity generation projects, such as offshore wind and solar developers, and along with FIDER, an early form of the scheme, has awarded contracts to new low carbon projects in Britain with a total capacity of 26.1GW.

The competitive nature of the scheme has already proven successful at placing downward pressure on prices since the first auction was held, with the per unit (MWh) price of offshore wind dropping by almost 70% between the first auction in 2015 and the latest in 2022.

Currently, Contracts for Difference are awarded based on the bid price submitted by renewable energy generating stations, such as an offshore wind farm – the aim being to increase deployment and ensure good value to electricity consumers and, over time, drive down costs.

The government is now seeking evidence and views about reviewing applications?not just on their ability to deliver low-cost renewable energy deployment, but also based on how much a renewable energy project contributes to the wider health of the renewable energy industry.

These reforms could see applicants considering overall costs alongside other ‘non price factors’ - such as supply chain sustainability, addressing skills gaps, innovation and enabling system and grid flexibility and operability - when submitting their bids, which could help drive investment in the sector, grow the economy and boost the country’s energy security. 

More investment in supply chain sustainability, for example, would help to reduce its carbon impact and access the resources and materials it needs to deploy sustainability at scale in the longer term. Investment to address the skills gaps would help to train the technicians needed to deploy ever larger renewable energy generation stages. 

Minister of State for Energy Security and Net Zero Graham Stuart said:?"Our flagship Contracts for Difference scheme has been hugely successful in supporting British low-carbon electricity generation, while also driving down costs for the benefit of consumers. But we want to go further to ensure we maximise the scheme’s potential to improve energy security and ensure renewable energy developers can make the necessary investment in supply chains and innovation, which will ultimately make for a stronger sector and help our economy to grow. This potential reform to the scheme to introduce non-price factors presents a solution to grow the renewable energy supply chain as we accelerate our energy transition plans to power more of Britain from Britain."

This Call for Evidence is part of our work to continue to evolve the CfD scheme as we consider long-term market arrangements through the Review of Electricity Market Arrangements (REMA). ? 

Building a more secure energy future with thriving green industries will also have the knock on effect of helping to deliver on our promise to grow our economy and create good jobs across the country, with billions of pounds in private investment and 68,000 green jobs supported since late 2020.

The government is exploring introducing non-price factors into the CfD auction allocation process following recommendations made in Chris Skidmore’s Net Zero Review and the report earlier this month from the Offshore Wind Champion Tim Pick.? 

If, following this Call for Evidence, appropriate changes to the CfD scheme have been identified and deemed more effective than other potential policy levers, the government will launch a consultation on more detailed proposals.? 

CfDs have already helped accelerate plans to diversify, decarbonise and domesticate our energy supplies, with the last round (AR4) securing almost 11GW of low carbon capacity - enough to generate sufficient electricity to power 12 million British homes.

Last month, the government committed a further budget of £205 million to the scheme for the fifth allocation round (AR5), confirming another year of significant financial backing by government for green industries and jobs.

Tim Pick, who recently completed his term as the Offshore Wind Champion, said:  "I very much welcome this Call for Evidence. As noted in my recent report, price-only CfD auctions have created a strong driver for innovation to drive down costs, but there is a need in the current climate to consider how to better develop new supply chains and associated jobs. The current global context arguably provides the justification for considering a more nuanced approach as part of a wider package of measures, especially as we seek to seize a first-mover advantage in the deployment of floating offshore wind technology at scale."

Adam Berman, Deputy Director for Advocacy at Energy UK, said: "The Contracts for Difference (CfD) programme has played a key role in ensuring the UK’s position as a global leader in low carbon technologies. But factors such as inflation, commodity price increases, and pressure from international competition mean that the UK will have to continue working hard to pull in the investment required to reach our Net Zero and energy security goals. We welcome the government’s ambition to build on the success of the CfD programme by recognising that the cost of delivering new renewables projects has risen significantly over recent months. If designed appropriately, the inclusion of new factors in the CfD could improve investment certainty for low carbon projects, boosting energy security as well as ensuring that all parts of the UK benefit from the jobs, skills, and supply chain opportunities these multi-billion pound investments bring"