The Evolution of UK CfDs for Low-Carbon Electricity

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Anticipated updates have been announced to the UK incentive regime for low-carbon electricity generation through the release of a UK Government consultation response.

TAKEAWAYS

  • The UK Government has published its response to the March 2020 consultation on contracts for difference (CfD) for low-carbon electricity generation.
  • Floating offshore wind will be included in the next CfD competitive auction in late 2021 as a distinct technology type, giving this new technology an advantage in obtaining CfDs.
  • Coal-to-biomass projects, now considered less “green,” will no longer be eligible for new CfDs.

The Consultation Results Are In
The UK Government consulted with industry to amend the CfD regime, first introduced in 2014, for a low-carbon electricity generation scheme in March 2020, and the responses from that consultation were published on 24 November.

The consultation response confirmed a number of changes to the CfD scheme. Those which will have the most impact for the renewable sector going forward relate to offshore floating wind and coal-to-biomass conversion projects. The consultation also discussed the co-location of renewable electricity generators with storage solutions, which will be an interesting future area for development of CfDs and other subsidy mechanisms.

Offshore Wind

Fixed and floating technologies for offshore wind will now be treated as two different technologies for CfD purposes. Fixed bottom offshore wind will have its own pot in the next competitive auctions for CfDs or allocation rounds, while floating offshore wind will be in the same pot as other less developed technologies (like tidal stream, wave and dedicated biomass with CHP).

The definition of floating offshore wind will need to be included in the relevant regulations and CfD contract. It is intended that this definition will apply to areas of seabed with greater depths than 45 meters. This is less than the current assumed position that floating offshore wind applies to depths above 60 metres but should enable greater deployment of floating foundations and development of more suitable areas of seabed.

It remains unsettled whether phasing will apply to floating offshore wind projects. This is the subject of a separate UK Government consultation. Phasing is the means by which larger offshore wind farms can be developed sequentially in up to three phases. Given the current size of the floating offshore wind market, this decision is perhaps less crucial for the 2021 CfD allocation round because the number of commercial floating offshore wind projects is still limited. But as project sizes for floating offshore wind start to equal those of fixed bottom offshore wind, application of phasing to floating offshore wind projects will certainly be helpful in due course for larger planned developments.

Biomass

There will now be no further coal-to-biomass conversion in future CfD allocation rounds. This is consistent with previous reductions of Government subsidies for biomass.

However, the UK Government continues to look at bioenergy with carbon capture and storage separately and has announced a new cross-government biomass strategy to look at how biomass is sourced and used. The degree of sustainability of biomass plants varies widely, and while large scale biomass plants importing copious quantities of biomass sourced overseas may be difficult to justify from an environmental perspective, small scale plants that are burning waste biomass sourced locally still have merit in the route to net zero. Certainly, the UK Government is looking to further consider and clarify its strategy in this area.

In any event, the UK Government confirmed that the minimum overall efficiency of 70% (net calorific value) and the GHG threshold of 29kCO2e/MWh will apply to the next CfD allocation round, as first discussed in the 2018 consultation.

Co-Location of Storage with Renewable Generation

The UK Government also reported on perceived barriers to co-location of storage with CfD projects.

Storage can be installed at a generation site which benefits from a CfD, but currently, such storage must be metered separately. Lithium ion storage can provide a short-term storage solution, whilst hydrogen can provide a seasonal energy storage solution. Whichever form of storage is installed, the additional metering is seen as a cost burden by generators. In addition, generators benefitting from CfDs are constrained from making significant post-operation changes to their sites per the existing standard terms of the CfD contract.

Further constraints are technology-specific. For instance, in the case of offshore wind co-located with hydrogen, developers cannot own the OFTO assets, and therefore they cannot own the network infrastructure where the onshore storage assets would be located. This is an issue in cases where hydrogen would be developed alongside offshore floating wind, as it means developers are unable to access the synergies of putting the two technologies to work together.

The UK Government’s view is that flexibility is needed to achieve net zero, and further work is required in this area to determine the right changes to bring the system forward flexibly. There are no changes to the current structure for the next allocation round in 2021, but the UK Government is seeking further inputs through a separate call for evidence.

Conclusions

The results of the consultation are in line with market expectations and illustrate that the CfD regime can be flexible with regard to new technologies like floating offshore wind. Further consultations will be held in relation to marine technologies and calls for evidence in relation to storage co-location. The CfD scheme will therefore continue to evolve in response to both these consultations and the anticipated UK Government energy white paper.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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