In the middle of Offshore Wind Week 2018 the Government has announced the draft budget for the next Contract for Difference auction round, which will take place in May 2019.

Despite a positive response from the Offshore Wind Industry Council, we think that most of the renewables industry will be underwhelmed (to say the least) by the £60 million made available (barely a tenth of the £557 million the Government has committed to future auctions) and a capacity cap of 6GW.

On the plus side, using so little of the budget now means there will be more for future rounds of course. Also, the low administrative strike prices, and relatively small difference between them and the predicted reference price, means in practice that any successful projects, in particular offshore wind projects, should need very little subsidy, so that £60 million may go just a little bit further.  

In the last auction in 2017 where the available budget was, by comparison, a healthy £290m, 11 projects were successful: 6 ACT projects cleared at strike prices of £74.75 in 2021/22 and £40 in 2022/23; 2 dedicated biomass with CHP projects also at a £74.75 strike price for 2021/22; and 3 offshore wind projects (Triton Knoll, Hornsea 2 and Moray) totalling almost 3.2GW at a strike price of £74.75 in 2021/22 and £57.50 in 2022/23.

Given that costs are continuing to fall, it is no surprise that the offshore wind administrative strike prices for this auction are even lower than the winning strike prices for the last.

The administrative strike prices have been set to enable the cheapest 25% of projects within each technology included in Pot 2 to compete in the third Allocation Round. 

But of course, the strike price isn't what a project gets paid.  The CfD is actually a payment based on the difference between the strike price and the market reference price. BEIS have set the draft reference prices as follows: 

If the draft reference prices are accurate, an offshore wind project awarded the administrative strike price in 2024/25 would only be paid a subsidy of less than £1 per MWh– that's effectively almost grid parity.

So that £60 million may still allow a few larger projects to win a subsidy.  Whether the other technologies can compete on price remains to be seen and we await the final allocation with interest.