UK Leasing

Experts doubt tomorrow’s renewable energy CfDs will cut costs

Britain’s Department for Business, Energy and Industrial Strategy is set to announce the winners of the latest renewable energy ‘contracts for difference’ auction on Thursday.

Allocating CFDs via these auctions has played a critical role in “stabilizing revenues” for low-carbon power producers, according to Dalia Majumder-Russell, partner in the firm’s Energy and Climate Change team. CMS lawyers Cameron McKenna Nabarro Olswang.

These long-term electricity contracts, originally introduced by the UK government in 2013, have helped reduce the cost of low-carbon electricity over the past decade by guaranteeing generators a floor price, known as the name “strike price”.

If wholesale prices fall below this benchmark, power generators receive a top-up amount, but conversely, if prices rise above the strike price, they are required to repay some of that money.

Amid rising wholesale power prices, “a lot of renewables are paying it back,” warned Majumder-Russell, who added that “they are expected to come down.”

The Contracts for Difference auction is a sealed tender for 15-year contracts at fixed rates that track the rate of inflation.

The latest auction, which is expected to be the largest yet, will lock in future prices for electricity to be delivered between March 2024 and March 2027. Energy companies were to submit sealed bids for the final round between May 24 and March 2027. June 15.

Credit Suisse expects this latest energy CfD auction to be larger than any to date, securing around 12 GW of energy capacity.

Solar and onshore wind projects were allowed to participate in the auction for the first time since 2019. Contracts they could win in the final round, for delivery in 2024 and 2025, are capped at 4 GW.

Prices fell to £40 per megawatt at the last long-term power contract auction in 2019, Majumder-Russell said.

“We’ve seen prices come down a lot… [it was] a very big drop,” she said. “There was a lot of pressure on the industry.”

Falling renewable energy costs are now in question, as turbine makers battle losses and low-carbon power producers face paying back money to the government amid high wholesale prices.

“I don’t know if we’ll see cheaper prices,” said Majumder-Russell, who specializes in complex process power and renewable energy projects. “It’s such a mature market now.”

Companies such as BP PLC (LSE:BP.) and Shell PLC (LSE:SHEL, NYSE:SHEL) which have been awarded land under the Crown Estate and ScotWind Seabed rounds of leases are also expected to be among the candidates for the contracts.

“Those who compete will be [large industry players] who won a lease in the rental round,” said Majumder-Russell. “BP and Shell will have to compete because they had these big leased projects.”

Credit Suisse predicted the auction could offer prices as low as £34 per MWh ($41) in equivalent 2011 prices, or as low as £54 per MWh in nominal terms.

The investment bank based its forecast on a combination of current turbine prices (Siemens and Gamesa’s Vestas are the most popular), average investment costs of around £2.2m per MW and factors load (the regularity of power generation by the plant) of 57%, in line with 2019 yields targeting around 7-8%.

He predicts Denmark’s Ørsted and Spain’s Iberdrola could be among the winners of the round, securing contracts for the Hornsea 3 and East Anglia 3 offshore wind projects.

READ: Cornwall and Wales could soon host floating wind farms, says Crown Estate

“The bottom-set offshore wind will be difficult to get down any further,” Majumder-Russell said. “Floating offshore wind – partly new testing the waters – don’t think it will hit rock bottom prices.”

In January, Shell and Scottish Power won the rights to a joint project at an auction north of the border, using technology they say will become a increasingly important part of the energy mix.

Much of the price savings that renewable energy projects have achieved over the years is based on reducing the cost of parts, while many manufacturers are now facing supply chain issues amid shortages. components such as semiconductors.

“Since [we have] seen a lot of turbine makers really struggling,” Majumder-Russell said. “[There is] only so long [that they] can take the losses.

Then there is the issue of option fees, a new annual charge imposed on developers in seabed rental cycles who have not yet obtained planning permission, which she says are “certainly a factor to find out if the cost will go down.

Majumder-Russell predicts power producers will be able to fend off further cost reductions amid rising interest rates and industry borrowing costs. Company power purchase agreements are also more widely available, meaning they don’t need to rely heavily on strike prices.

It takes an average of a decade to plan an offshore wind farm, and successful competitors will be those with seabed leases and grid connection agreements in place.

With all its problems as well as its benefits, the CfD program was due to end in 2027 but is currently under review by the electricity market.

The government has announced a move towards annual auctions, Majumder-Russell said, expecting them to continue, not least because it has yet to meet its target of providing 40 GW of low-cost electricity. carbon emissions by 2040.