Changes to UK Onshore Wind and Contracts for Difference (CfD) – what you need to know
In February 2020, the UK government reopened the Contracts for Difference (CfD) scheme for new onshore wind developments, meaning long-term investors can once again compete for government contracts following a 4-year ban. This U-turn will allow more onshore wind developments to support the shift to green energy, as Nik Holland, Manager – Operations and Regulatory Intelligence, explains.
Onshore wind farms are a cheap and economical solution for renewable generation, particularly as we shift to green energy following the introduction of the 2050 net zero targets.
Onshore wind projects subsidies were previously removed by the UK government in 2016. Although leading to a decrease in the development of onshore wind farms, it helped fuel the success of offshore wind farms as a second-generation green technology. Following the announcement in February, however, onshore wind projects are about to make a comeback.
How will CfD impact on onshore wind developments?
By re-opening the Contracts for Difference (CfD) scheme to new onshore wind developments, the UK government has created another source of funding for these projects. It had previously been reported that Scottish Power had already identified up to 100 sites across Scotland and Ireland to build new onshore wind, with perhaps 3GW of capacity in Scotland alone, in anticipation of the government’s announcement.
Whilst new sources of funding will of course help move these projects closer to completion, they still have to get past some incredibly tough planning laws, local engagement plans and environmental surveys – all of which have to be completed before projects can get off the ground.
How are Power Purchase Agreements (PPA) being affected?
How this change will affect the Power Purchase Agreements (PPA) market is currently under discussion. PPAs are an agreement for one party to buy power from another that typically last between 5 and 20 years. New life is being breathed into this concept as end users are now willing to step in and take one side of a PPA, as they want the certainty of renewable power.
Investors often seek PPAs to help provide additional renewable sources of generation as well as guaranteeing a source of energy. These new forms of generator/end user PPA have gained traction with those looking to finance a new generation source because they could no longer access funding from subsidies – or that funding was no longer attractive.
For some builders of new generation, applying for a CfD may be preferable to trying to find an end user PPA counterparty. After all, this is underwritten by the government and a CfD is a safe credit counterparty option.
Unfortunately, there aren’t many investment grade consumers who currently have the appetite for their own PPA and can guarantee off-taking all of the power from a wind-farm that has not even had a foundation built yet, that will last for a period of 10-15 years but won’t start for another three years.
Reopening CfD will potentially be a benefit to developers who may be able to underwrite their projects with less risk, but it won’t stop those institutions that really want to buy power from source.
Investors need to be aware that gaining a CfD is not a given and projects may move a little further along the investment to build pipeline as people consider CfD, however, they may need an end user PPA if they fail to win a CfD.
How World Kinect Energy Services can help
Power Purchase Agreements (PPAs) can help provide financial stability, support carbon neutral goals, as well as ensure continuity of supply. Our team at World Kinect Energy Services can help navigate the pitfalls of complex energy markets, and let customers concentrate on their main business.
Driven by data, World Kinect Energy Services has a proven track record when it comes to securing maximum value from PPAs. With expertise on local markets and regulations and risk management, as well as access to power exchanges, OTC markets, balancing markets and green markets, we provide a global one-stop-shop for all energy purchasing needs.
How can sustainability experts help you reach your carbon off-setting targets?
At World Kinect Energy Services, our aim is to help ensure vehicles are fueled, facilities are powered, and businesses operate efficiently, with lower carbon footprints.
Our team of experts can help create bespoke sustainability strategies, provide carbon footprint reporting and advise on carbon offsetting, Renewable Energy Certificates and carbon compliance.