CFD ALLOCATION ROUND 5

WHAT WILL CFD ALLOCATION ROUND 5 BRING TO THE ECONOMY?

by Chelsea Bailey

After Allocation Round 5 (AR5) of the CfD scheme opened to applications from generators of renewable technologies in March, how will this support the increase in hydrogen use and reduce the costs of doing so?

CfD has been designed to deliver the low-carbon electricity that we need to meet the UK’s climate change targets at minimum cost to consumers and do this by attracting new investment into lowcarbon generation.

The CfD was introduced under the Coalition Government to promote lowcarbon forms of generation. It is a private law contract between a generator and the Low Carbon Contracts Company (LCCC), which is owned by the government, under which the generator’s income per unit of electricity is fixed.

This is done by committing to pay or being paid a difference payment, which is calculated by comparing a reference price and the generator’s strike price. If the reference price is below the strike price, LCCC pays the generator the difference, with the money coming from a levy placed on electricity suppliers.

When the strike price is below the reference price, the generator pays LCCC the difference, and the money is channelled back to suppliers. For intermittent generators like offshore wind projects, which constitute most of the CfD portfolio, the reference price is set for each hour and is based on the results of auctions for power held the day ahead of generation.

CfD is helping to diversify the UK’s energy mix

While AR1 focused on offshore wind, AR4 has evolved to support a variety of technologies, including tidal stream and floating offshore wind for the first time, as well as established solar, onshore and offshore wind technologies.

Increasing the diversity of the UK’s energy mix has been a central aim of the CfD scheme, and AR5 is the biggest round yet.

Andy Hawkins, Policy and Commercial Development Manager at LCCC, revealed to Hydrogen Industry Leaders that the Allocation Rounds have grown massively: “It has grown in terms of introducing emerging and more established technologies. For example, AR4 was the first time since AR2 that solar was reintroduced.”

He continued by explaining the benefits of the AR: “We have seen more capacity to get procured over time because it shows that the CfD is a trust investment tool for generators and also investors; it helps the UK achieve its net zero targets as well.”

Some of the most significant differences from AR4 are the additional check of compliance with Private Network Agreement eligibility criteria in Rule 4, the simplification of Notice of Auction requirements in Rule 10, and the addition of a definition of a Private Network Generator in Schedule 1.

Speaking on these differences, Andy said that from AR5, annual auctions will be introduced, which is seen as: “A positive move for the market and shows the additional confidence in the CfD.”

Andy outlined that AR5 will be split into two Pots: “There is £170 million set aside for Pot One, which has got the introduction of remote island wind and offshore wind for the first time. Pot Two, which is the emerging technologies, has got £35 million set aside for it, with £10 million specifically just for tidal.”

Investors have confidence in the CfD

For most of the time that the CfD has been operating, reference prices have been below the strike prices of projects, and LCCC has been levying suppliers to fund difference payments to generators. However, in September 2021, market prices rose to the point where, over the whole CfD portfolio, generators were paying back to the LCCC. Given this situation, the levy on suppliers was set to zero and has remained there since. LCCC pays the accumulated surplus from generators to suppliers at the end of each quarter.

Andy spoke about how LCCC are aware of the economic issues for the generators from AR4 and fully understands that: “The market is volatile at the moment, but the Strike Price gives out security to generators and to investors that they know how much they’re going to get over a certain period of time that ultimately helps them with reducing the cost of capital for their projects.”

This security is key to building confidence in the hydrogen industry. Oliver Coe, Lead Contract Manager – Hydrogen at Low Carbon Contracts Company, explained that the scheme is good for the consumer, reaching our net zero targets and retaining investor confidence.

He said: “I think as a general endorsement of the CfD as a mechanism is that investors have confidence in it and that it is being replicated across the energy industry. We’ve got the Dispatchable Power Agreement, which is power with carbon capture; we’ve got the Industrial Carbon Capture business model and hydrogen business models.”

Dr Alex Holland Principal Technology Analyst IDTechEx