Results in for first CfD action – solar parks lose out

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Results in for first CfD auction - solar parks lose out

March 2015

solar parks lose out

The results of the first Contracts for Difference (CfD) auction have just been announced.  There have been 27 successful projects receiving more than £315m but this pales into insignificance compared to last year’s budget of £3.1billion for renewables under the Renewables Obligation (RO) budget for 2014/15.

The CfD budget is for projects of more than 5MW. So farmers developing small scale renewable energy projects will not be affected, but landowners will be affected by a reduction in the number of solar parks exceeding 5MW and also wind farms on their land – where typically they will be leasing their land in exchange for a rent. 

Mark Newton comments “Under the CfD auction process it is the lowest bids that are accepted, thus increasing the competition for contracts and driving down the price for some technologies and leaving some larger projects economically unviable.

Onshore wind was the main winner in this initial auction being allocated 15 out of the 27 contracts awarded. The strike price was just under £80 per MWh for projects to be delivered in 2016-2018 which compares to a figure of £95 per MWh currently being realised under RO support, a reduction of 17%."

Mark Newton adds “the consensus within the onshore wind industry is that it can live with this and it is the lower wind speed sites that are likely to struggle in the future and not be viable. Therefore, moving forward, it will be the higher wind speed sites that are likely to be successful, favouring areas like Scotland.”

Many solar park developers did not bid in the first auction because they already had planning permission and a grid connection, therefore already qualifying for the more lucrative RO payments provided they are able to commission by 1 April 2015.  Solar parks with delayed planning or grid connection issues (therefore too late for RO payments and being able to commission by 1 April 2015) were the ones who applied and were the main losers in this auction. 

There were only two successful CfD solar park projects set for delivery in 2015/16, amounting to just under 33 MW in total and their successful strike price was £50 per MWh compared with a current strike price of approximately £120 per MWh, which is a massive reduction of just under 60%.  This price is only just above the current electricity prices and therefore these projects are not likely to be viable.  In order for a solar park to be commercially viable the price really needs to be at least £80 per MWh and preferably over £90 per MWh.

In the last couple of years there have been at least 2,000 MWs of solar parks built each year under the RO regime however in the next two years only five solar park projects larger than 5MWs are due for delivery under the CfD scheme.  The future of solar parks above 5MW is going to be very limited until they reach grid parity i.e. when they need no support price, which is expected to be in about 2020.

Mark Newton concludes “the short term future for solar parks is only likely to be for projects of 5MW or below as they will then come under the FIT regime. There is a risk though that if too many are built under this regime, then the government will impose further degression making sub-5MW solar parks unviable.  Adding further complexity, there are often grid issues with 5MW or smaller solar parks, as they are often too small and unable to achieve the economies of scale required to be connected into 33 kV lines when there is limited or no capacity in the smaller 11kV lines.  Grid capacity is a big issue for all renewable energy projects across the country”.

The next CfD auction will be in October 2015 but in order to bid, renewable developers are required to have in place a planning permission and a grid connection. If the strike price is likely to be too low to make the project viable then the future of larger scale renewables under the current CfD regime is not at all positive.  However we have an election coming up in May this year and a new government will hopefully want to support renewable energy. We hope they will make the CfD auction more financially attractive for the renewable energy stakeholders and this will benefit farmers and landowners with larger renewable projects on their land.


 
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