The Government is working to change the rules of Allocation Round 7 and for Drax so we pay more subsidies for “cheap” renewables.

DAVID TURVER

Introduction

We are all supposed to believe that offshore wind is nine times cheaper than gas and we can become the Saudi Arabia of Wind if we just build more of these magic windmills. Nobody has ever explained why we need annual auctions to decide which projects should be financed by subsidies paid for through our energy bills if wind power is so wonderfully cheap.

The Government is pressing on with its Clean Power 2030 plans to spend £260-290bn by 2030 to save at most £7bn per year on gas for electricity. However, judging by recent announcements about Allocation Round 7 (AR7) Contract for Difference (CfD) auction and the extension of Drax’s tree-burning contract, the plans seem to be hitting the buffers, demonstrating that Net Zero is not working.

Clean Industry Bonus

First up, we have the Clean Industry Bonus (CIB), formerly known as Sustainable Industry Rewards (SIRs) that were first introduced as Non-Price Factors (NPFs). THe CIB process is being managed as part of AR7 and has been introduced “to support good jobs and low-carbon manufacturing factories.” They never quite explain why these factories need extra support if they are making the components required for all this “cheap” renewable energy.

There are quite a few complex documents describing how the CIB scheme will work such as the CIB Allocation Framework and CIB Budget Notice. As far as I can tell, developers will receive up to £27m spread over four years for each gigawatt of capacity if they meet certain standards and invest enough in manufacturing facilities in certain areas of the country.

The CIB payments will be managed through CfD payment process and amount to an extra bung on top of the CfD subsidies they receive. For those interested in more of the detail, I did ask Grok to summarise the CIB documents for me here.

Contracts for Difference Proposals

The Government has also begun a consultation on changes it wants to make to the AR7 auction process. The very existence of this consultation at this time is very odd in itself. The consultation will run until 21 March and the auction will not open until Summer 2025. By contrast, we knew the Administrative Strike Prices for AR6 in November 2023, the Budget Notice was published in early March 2024 and the auction process began later that month. This new consultation and extended timeline indicate that all is not well in the world of wind.

The consultation proposes reforms in several areas. Perhaps the most significant is they are proposing to extend the duration of CfD contracts beyond the current 15-year term. This would of course mean that projects would receive subsidies for a longer period. The government hopes extending the contracts will encourage generators to offer lower strike prices in the auction because they have better visibility of revenue for a longer period which ought to help them reduce the cost of capital. However, when there is a lot of wind capacity on the grid, the number of times that wind farms will be producing excess electricity will increase. At these times, wholesale prices plummet to zero, or sometimes even negative. Without a CfD contract, windfarms would have to either accept a very low price for a large portion of their output, or in extremis even pay others to take their surplus power away. Of course, this destroys the economics of wind farms, if they cannot get paid when they are producing most, then they need to charge much more when generating moderate output that can be absorbed by the market. Extending the contracts gives them some protection against this. However, more modern contracts do not pay subsidies if wholesale prices drop below zero for more than an hour. Perhaps developers are getting nervous that they will not get paid much when they are generating most (see Intermittent Negative Price Period).

The Government also proposes to change the way the budget for AR7 is set. Instead of setting the budget before the auction begins, the budget notice will not be published until after sealed bids have been received. They say the proposed change would allow auction budgets for fixed offshore wind “to be set to maximise capacity” and could “enable the Government to procure more fixed-bottom offshore wind, subject to value for money considerations, to deliver clean power by 2030.” This sounds like the Government has taken on board the Climate Change Committee’s recommendation to prioritise volume over cost. Inevitably, this means higher prices for longer.

Another significant proposal is to allow fixed offshore wind projects to bid for CfD contracts before receiving planning permission. This sounds like the Government is struggling to find enough projects to meet its Clean Power 2030 plan.

The Government has also said that it does not see a case for reducing the strike price for floating offshore wind projects that were set at £245/MWh in 2024 prices (£176/MWh in 2012 prices) in AR6. This is bad news for billpayers because contracts were awarded £195/MWh (2024 prices) in AR6. This seems to suggest that floating offshore wind prices are not coming down, despite the CIB bung and longer contracts. This means bills are going up.

More Subsidies for Drax

In related news, the Government made a statement to the House about its intention to extend the subsidy scheme for tree-burning at Drax power station. Drax has different operating units that operate under different subsidy regimes – Renewables Obligations (RO) and CfDs. The RO scheme is due to finish in March 2027. This subsidy regime needs to be replaced because if Drax closed, we could lose vital dispatchable power capacity required when wind and solar are not producing very much. It appears the new arrangements will also replace the existing CfD contract too.

Energy Minister Michael Shanks claimed the new arrangements operating from 2027 to 2031 will halve the subsidies for this Drax unit and this was parroted by the media including the BBC. But this is not the full story.

The existing RO-subsidised plant receives one certificate for each MWh of electricity produced. In today’s terms that certificate is worth £64.73. This certificate is paid in addition to the market price Drax receives for its electricity, but we do not know for certain what Drax gets paid for its power. We can estimate it from the Baseload Market Reference Price (BMRP) that is used in CfD calculations which is currently £86/MWh. So, Drax receives about £151/MWh in total for its RO-funded units. For its CfD-funded unit, Drax receives a total of just over £138/MWh, which is the current strike price (£100/MWh at 2012 prices). The Government announced that the new strike price in 2012 money will be £113/MWh, which translates to about £158/MWh in 2024 prices. The claim that subsidies will halve is based on running the plant less often, rather than paying them less per MWh of generation. In fact we will be paying more per MWh for electricity from Drax than before.

Apparently, Drax will only be able to operate at a maximum 27% load factor to be eligible for CfD payments and a profit clawback scheme will be in operation. However, it is not clear what happens if the grid operator needs Drax to operate more than the allowed hours. Most of our nuclear fleet is scheduled to retire well before 2031 and no doubt some of our existing gas fleet reach end of life too. Drax will be a vital part of our dispatchable power capacity and may be required to keep the lights on. If it has already passed the 27% limit, will Drax be able to charge penal rates outside of the CfD mechanism to keep the lights on? The Government has been silent on this matter.

Conclusions

With extra bungs to encourage investment and a new consultation at such a late stage, we know the world of renewables is in trouble. The proposed longer contracts and the apparently inevitable higher prices for floating offshore wind mean our bills are going to continue their inexorable rise. The extension of eligibility criteria to projects without planning permission looks like the Government is struggling to find projects to meet its target of near-quadrupling offshore wind by 2030. While the Government claims that the subsidies due to Drax will halve, the price per MWh is actually going to rise.

We are already seeing the demise of vital industries like steel-making, chemicals, ceramics and oil refining. More expensive, less reliable electricity will only accelerate this de-industrialisation. It is clear that Labour’s Clean Power 2030 plan is in some trouble and Net Zero is not working.

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This article (AR7 Changes Show Net Zero is Not Working) was created and published by David Turver and is republished here under “Fair Use”

Featured image: unsplash.com

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