By: Steve Atkins - Principal Consultant, Consultus Interational Group
In a government press release this morning, the UK’s Energy Security Secretary, Grant Shapps, has announced a further £22 million of government backing into renewable projects via the Contracts for Difference Scheme. The additional spending takes the budget to £227 million for the upcoming auction, which the government hopes will make the UK the “first choice” for investors
What is the Contracts for Difference Scheme?
The Contracts for Difference (CfD) scheme promotes investment in large-scale renewable generation by guaranteeing a price for every MWh generated. Known as a “strike price”, the Scheme guarantees returns on long term investment in a market that can often be uncertain and volatile. It is paid for by end users, with suppliers effectively recouping the costs through energy bills.
What projects are being funded?
Today’s announcement will see the following additional backing from the UK government:
- A budget increase of £20 million for solar and offshore wind, from £170 million to £190 million.
- An increase for emerging technologies such as floating wind turbines from £35 million to £37 million.
- Tidal energy backing remains ring-fenced at £10 million.
The government also claims that investment in renewable energy projects is also providing employment opportunities, with 25,000 people employed in the sector in 2021.
Energy Security of Supply
The additional investment is being unveiled today against a backdrop of increased risk internationally for energy supplies; the government hopes that the news will provide the market with confidence into the coming years, as well as taking a further step towards the UK’s firm net-zero commitments.
The past two years have seen energy security rise to the top of the government’s risk register, as Russia’s invasion of Ukraine has thrown Europe’s dependence on gas imports into the spotlight.
Despite renewable output rising to around 42% of the overall supply mix in 2020, the UK still has a reliance on gas for power generation, a fact thrown starkly into the spotlight by Prime Minister, Rishi Sunak, this week as further licensing rounds for investment in North Sea oil and gas projects were announced.
The matter has created a dilemma for the Conservative government, whose messaging must simultaneously convey a need for fossil-fuel led security of supply, whilst also promoting the UK’s Net Zero ambitions. The two aspirations seem genuinely at odds.
What is the market and customer impact?
Since the introduction of the Contracts for Difference Scheme in 2010, the levy funding for renewables has totalled over £80 billion. Actual costs will depend on a variety of factors, including the actual outturn of wholesale power prices in the market, the strike prices that are negotiated and agreed with generators, and the volume and type of capacity awarded.
For customers, the additional investment will mean further subsidy through their energy bills. The scale of this will not be clear until the auctions take place and once actual energy prices are known. For certain however, the net zero transition does come at a financial cost; perhaps the cost of inaction is greater.