PwC comments on the Contracts for Difference (CfD) Allocation Round 5

Vicky Parker, Head of Power and Utilities at PwC UK, said: 

“The latest results from the fifth allocation round will come as a surprise to many, as for the first time, no offshore wind projects were awarded CfD contracts. Results are in stark contrast from the last allocation round in September 2022 (AR4), where 7GW of offshore wind projects were awarded a CfD and will put pressure on net zero ambitions based on the development of offshore wind. The results showed healthy competition and positive uptake in other technologies, particularly with solar, tidal and onshore wind - which will benefit from relaxed planning rules announced earlier this week. However, this outcome should prompt the need for a broader discussion to ensure that the market can deliver on the government’s offshore wind targets.

“The primary reason for the mechanism not awarding offshore contracts is down to the increase in supply chain costs faced by the sector and the current energy pricing environment. Steel prices in July 2023 were c.50% higher than July 2020 and only as recently as July 2022 were 120% higher than July 2020, placing significant strain on the costs of turbines and foundations. This has created a challenge for offshore wind developers, who as a result of the maximum strike price of £44/MWh set by the government, potentially faced entering loss-making contracts. This is both on account of higher capex and opex costs, but also on the basis that current electricity prices are above the maximum strike price, which would result in developers having to make payments to the scheme’s administrators under current arrangements.

“In addition to denting the UK’s decarbonisation ambitions, the results of the allocation round will also have wider implications. The offshore wind industry is also a key part of the UK’s overall industrial strategy, supporting local supply chains and jobs. The government had earlier this year talked about its ambition of 100,000 jobs in the industry by 2030. However, the most recent allocation results will challenge this, and there is a risk that in the absence of a commercially viable case for offshore wind today, the UK will not see the necessary development in skills and supporting areas necessary to support future growth in the industry, should some of the challenges be addressed.

“Questions will undoubtedly be raised as to the scheme’s continued effectiveness given the changing market conditions. While to some extent this is true, as the mechanism failed to bring forward investment in offshore wind, there are some arguments to indicate that it worked as intended. That is, all the budget was allocated and for consumers it was a good deal, as the cheapest technologies won.”