| Work Detail |
Wind and solar developers struggling with challenging strike price caps amid cost increases
The UK renewables sector is braced for the results of this year’s Contracts for Difference, which are expected later this week.
The Department of Energy Security and Net Zero is due to outline the winners of the £227m Allocation Round 5 on either Thursday or Friday.
Officials are currently leaning towards delivering the outcome on Friday, according to sources.
Developers of offshore and onshore wind as well as solar and marine projects were eligible to enter the round.
However, in offshore wind, experts predict the auction will be undersubscribed as developers say they cannot deliver projects at the £44 per megawatt-hour strike price cap amidst at least 40% capex cost increases in the last year.
ScottishPower Renewables and Vattenfall control three of the four eligible fixed-bottom sites, two arrays totalling 1.5GW at the EA Hub zone and the 1.8GW-plus Norfolk Vanguard, respectively.
SSE Renewables said earlier this year it will not take part with the 500MW Seagreen 1a off Scotland as it said the strike price cap does not reflect cost increases.
Two floating wind projects were eligible to enter the auction’s Pot 2.
DESNZ set the strike price cap at £116/MWh for the nascent sector.
Developers are battling offshore wind, geothermal, tidal stream and wave for support.
Onshore wind developers will meanwhile compete in the auction for the second year running having been excluded from rounds two and three.
A roughly 2GW pipeline is understood as being eligible to bid, mostly in Scotland, as well as the remote islands category.
As in offshore, however, cost pressures across the industry could deter developers who will struggle to match the £53/MWh administrative strike price, which has been retained from last year despite a deteriorating economic climate.
Solar may build on its success in the 2022 AR4 auction, which delivered around 2.2GW of PV capacity.
Senior research associate for British power markets at Aurora Energy Research Ashutosh Padelkar said the technology could dominate the auction, where it will compete in Pot 1 with onshore and offshore wind.
“Solar PV developers are less impacted by the current cost pressures than their onshore and offshore wind counterparts, due to lower overall costs and higher administrative strike prices in AR5,” he said.
“If the Pot 1 budget were to be split equally between solar PV, onshore wind, and offshore wind, it could feasibly support roughly 3GW of solar PV capacity, 700MW of onshore wind and 700MW of offshore wind.
“We expect that most of the AR5 contracts for large-scale (above 250MW) projects will cover only part of the projects’ respective capacities, as developers opt to combine CfDs with merchant or PPA financing and seek to boost projects’ profitability.
“Such hybrid financing models have not featured heavily in previous CfD allocation rounds – only one offshore wind project opted for hybrid financing in AR3 in 2019, while two projects chose this strategy in AR4 in 2022.
“Hybrid financing enables developers to better adapt the risk-reward profiles of projects to their needs, increasing the likelihood that a project will reach financial close and, eventually, come online.”
*For full coverage of the results tune into reNEWS.biz later this week |
