UK Opens Third CFD Auction
The Department for Business, Energy and Industrial Strategy (BEIS) in the UK has launched its third Contracts for Difference (CFD). The auction of this allocation round is estimated to have a budget worth £65 million. The aim of the auction is to generate at least 6 GW (gigawatt) of electricity.
A CFD agreement is a private contract drawn between a generator party and a government owned company. You can read more about the meaning of CFDs in this article
In this case, the generator party is a low carbon electricity generator, and the UK government company is the Low Carbon Contracts Company (LCCC).The agreement of a CFD is founded on the generator party being paid the difference between the ‘strike price’ and the ‘reference price’.
The ‘strike price’ is the price for electricity that reflects the investment cost in a specific low carbon technology. On the other hand, the ‘reference price’ measures the mean market price for electricity in the Great Britain market.
How Contracts for Difference (CFD) Work
The contracts for difference helps investors lock down a predetermined price for the low carbon electricity expected to be produced during the timeframe of the contract. The CFD makes the investment in low carbon electricity relatively secure by cutting down the effect of wholesale price volatility in the market. This further helps customers avoid paying extremely high support costs when the price for electricity rises.
Currently, the Department for Business, Energy and Industrial Strategy (BEIS) is taking the focus away from established technologies (the Pot 1s) and is targeting less established renewable technologies (known as the Pot 2s). Pot 2 renewable technologies include offshore island winds, waves and tidal technologies; all wind energy as opposed to Pot 1, diversified solar and hydro energy. The BEIS is planning a budget for the years 2023-2024 and years 2024-2025. The budget is equipped to allocate 6 GW (gigawatt) of electricity capacity. The BEIS is making plans to set agreed prices for offshore wind projects to £56/MWh and £53/MWh for years 2023-2024 and 2024-25 respectively. You can get more information about CFD trading in this article here
Previous Records of CFD Contracts
The very first CFD contract (AR1) was launched in October 2014 and ended in March 2015. The second CFD allocation round (AR2) took place in 2017 from March to September. It is still the most successful CfD allocation round, unearthing three efficacious offshore wind farms which are: the Hornsea Project Two, the Moray Offshore Windfarm (East) and Triton Knoll. Round 2 results were announced on the 11thof September, 2017; the round effectively forcing down the cost of offshore wind energy in the UK by almost 50% to a new price of £57.50/MWh—miles ahead of the previous round. In fact, the second CfD round allocation made offshore wind technologies cheaper than the cost of nuclear power which was set at £92.50; and also cheaper than low-priced gas energy. These figures were published by the BEIS.
The largest offshore wind technology capacity in the world is owned by the UK. According to the BEIS, the combined turnover of low carbon electricity business is an aggregate of £43bn. These businesses also employ well over 230,000 people. The UK is home to about 8 GW of established offshore wind capacity. It also leads the world in low carbon production, most of which is credited to the world’s biggest offshore wind farm: the Hornsea Project One. The project is currently under construction about 120km off the Yorkshire coast. The 1.2 GW project is expected to be commissioned in 2020 and will feature over 170 Siemens Gamesa SWT-7.0-154 turbines. The estimated reach of the Hornsea Project One’s energy production is estimated to power over a million homes.