Solar PV strike price holds at £75/MWh for UK CfD AR8

The UK's Contracts for Difference (CfD) Allocation Round 8 (AR8) has maintained the administrative strike price (ASP) for Solar PV plants at £75/MWh, matching the rate from the previous Round.1 This decision, with prices benchmarked to 2024, solidifies Solar PV's position as a highly competitive and cost-effective renewable energy source. This stability, alongside new auction terms such as extended 20-year contract lengths, aims to boost investment certainty in clean energy projects. Industry observers have noted the freezing of strike price caps for AR8.

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Understanding the UK Contracts for Difference (CfD) scheme

The Contracts for Difference (CfD) scheme is the UK government's primary mechanism for encouraging investment in Low-carbon electricity generation. It provides a stable framework for renewable energy projects, reducing financial risks and fostering the development of a diverse energy mix.

What is a CfD and how does it work?

A CfD is a private law contract between a Low-carbon electricity generator and the Low Carbon Contracts Company (LCCC), a government-owned entity. This contract guarantees a fixed "strike price" for the electricity produced over a long-term period, now extended to 20 years from the typical 15 years. If the market price for electricity falls below this agreed strike price, the LCCC pays the generator the difference. Conversely, if the market price rises above the strike price, the generator pays the difference back to the LCCC. This mechanism stabilises revenue for generators, protecting them from volatile wholesale prices, while also shielding consumers from increased support costs when electricity prices are high.

The role of administrative strike prices (ASPs)

Administrative Strike Prices (ASPs) are the maximum bids that generators can submit in a CfD auction. These prices are set by the Department for Energy Security and Net Zero (DESNZ). Historically, the final strike prices awarded to successful projects in CfD auctions are typically 15-20% lower than these administrative strike prices, demonstrating the competitive nature of the bidding process.

CfDs in the UK energy market

The CfD scheme is a cornerstone of the UK's energy policy, designed to incentivise the significant investment required for Low-carbon electricity generation. The DESNZ is responsible for setting CfD policy and ASPs, aiming to shape auction outcomes and ensure value for money for consumers. By providing revenue certainty, CfDs enable developers to secure financing for large-scale renewable projects, contributing directly to the UK's decarbonisation goals and energy security strategy.

Allocation Round 8 (AR8): key strike price decisions

AR8 introduces several important updates to the CfD scheme. These updates follow extensive consultations and regulatory changes.

Solar PV administrative strike price: £75/MWh

For AR8, the ASP for Solar PV plants remains at £75/MWh, consistent with Allocation Round 7 (AR7). This price is benchmarked to 2024 values, highlighting solar's continued cost-effectiveness. Solar PV maintains its position as the cheapest technology compared to other renewable sources, with onshore wind at £92/MWh, offshore wind at £113/MWh, and floating offshore wind at £271/MWh. This stable and competitive ASP is crucial for driving further investment and deployment of solar capacity across the UK.

New terms: 20-year contracts and Gate 2 connection

AR8 introduces significant changes to contract terms and eligibility criteria. CfD contracts have been extended to 20 years, a notable increase from the previous 15-year term. This longer contract duration provides enhanced revenue certainty for developers, making projects more attractive to investors and helping to balance the high upfront costs of renewable infrastructure. Additionally, eligibility for CfD projects in AR8 now requires a Gate 2 connection offer. This tightened requirement ensures that only projects with a more advanced stage of grid connection readiness can participate, aiming to streamline the development process and reduce potential delays.

Established technologies: individual pots

A key change for AR8 is the splitting of established technologies into individual pots, rather than having them compete within a single pot. This new pot structure allows for more granular control over auction outcomes and enables DESNZ to better assess value for money across different technologies. For instance, solar and onshore wind, previously grouped, will now compete in separate categories. This strategic adjustment aims to provide greater flexibility in the government's procurement strategy and more control over the technology mix that receives support.

Impact on renewable energy investment and development

The CfD scheme, particularly with the refinements seen in AR8, plays a pivotal role in shaping the landscape of renewable energy investment and development in the UK.

De-risking investment for clean energy projects

CfDs are fundamental to de-risking investment in clean energy projects. By guaranteeing a stable price for electricity generated, they shield developers from the volatility of wholesale energy markets. This revenue certainty is critical for securing the substantial upfront capital needed for large-scale renewable infrastructure, such as solar farms and wind projects. The extension of contract lengths to 20 years further enhances this stability, making long-term financing more accessible and attractive for investors.

Driving down renewable technology costs

The competitive auction process inherent in the CfD scheme has historically driven down the cost of renewable energy technologies. Developers bid against each other to offer the lowest price at which they are willing to supply electricity, leading to continuous innovation and efficiency improvements across the sector. This competitive pressure ensures that the UK secures renewable energy at the most economical rates, ultimately benefiting consumers.

Investment certainty and value for money

The new terms introduced in AR8, such as the 20-year contract lengths and the individual pots for established technologies, are designed to enhance investment certainty and ensure value for money. By requiring projects to have a Gate 2 connection offer, the scheme prioritises projects that are further along in their development, reducing speculative bids and increasing the likelihood of successful project delivery. These measures reflect DESNZ's commitment to shaping auction outcomes strategically, ensuring that public funds are used effectively to build a robust and reliable clean energy system.

CfDs and the future of UK energy security

The CfD scheme is more than just a funding mechanism; it's a strategic tool that underpins the UK's energy security and its transition to a clean energy future. It specifically supports renewable generators.

Contribution to clean electricity generation

By incentivising investment in renewable technologies like solar and wind, CfDs directly contribute to increasing the proportion of clean electricity in the UK's energy mix. This reduces reliance on fossil fuels, lowers carbon emissions, and helps the UK meet its ambitious climate targets. The continued support for Solar PV, with its maintained competitive ASP, ensures a strong pipeline of projects that will generate significant amounts of clean power.

Aligning with DESNZ energy policy

The CfD scheme is central to the DESNZ's energy policy, aligning with its goals for decarbonisation, energy security, and economic growth. The adjustments in AR8, including the refined pot structure and stricter connection requirements, demonstrate a proactive approach to managing the energy transition. These policy decisions aim to create a resilient energy system that can withstand global market fluctuations and deliver affordable, reliable power to homes across the UK.

The path to an abundant energy future

The continuous evolution of the CfD framework, with its focus on de-risking investment and driving down costs, is a critical step towards an abundant energy future. This framework is a key part of the UK's energy landscape. By fostering a predictable and attractive investment environment, the scheme helps accelerate the deployment of clean energy technologies. The CfD mechanism, by helping to deliver affordable, clean energy, is a critical component in the UK's transition to a future with abundant power.

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References

1. PV Tech. UK CfD strike price stays at £75/MWh in latest auction.