UK renewables auction opens with cost at center of government's focus

The UK's eighth renewable energy auction opened to applications July 20, with the government signaling that affordability will be the central focus of the bidding round as it seeks to balance its ambitious 2030 clean power targets against pressures to keep consumer bills in check.

Allocation Round 8 (AR8) of the contracts for difference (CFD) auction launches on the same day that Andy Burnham officially takes over as UK prime minister, following Keir Starmer's resignation in June.

With British households and businesses facing some of the world's highest electricity bills, Burnham has pledged to develop a 10-year plan to bring down costs.

Previewing AR8 in a speech at an offshore wind conference in June, UK Energy Minister Michael Shanks said that although "securing more offshore wind and more investment is critical, it cannot and will not be at any price."

Against that backdrop, the Department for Energy Security and Net-Zero (DESNZ) has already opted to freeze the auction's maximum bid prices at the same levels as the previous record-breaking round.

Allocation Round 7 (AR7) earlier this year awarded CFDs to nearly 15 gigawatts of new wind and solar capacity, including a record 8.4 GW of offshore wind projects at an average price of £90.91/megawatt-hour in 2024 money.

Offshore wind's administrative strike price in AR8 remains at £113/MWh, while solar and onshore wind are capped at £75/MWh and £92/MWh, respectively.

Budget flexibility

The government's decision to freeze strike prices for AR8 reflects the relatively short window since the last auction, as well as no material change in input costs in that time, according to industry observers.

"While the outbreak of the conflict in the Middle East poses some risk to supply chain and construction costs, I would still not expect the [administrative strike prices] to prove a hard constraint," said Calum Andrews, European power analyst at S&P Global Energy CERA.

Among several tweaks to the bidding parameters for AR8, the government has greater flexibility to set different clearing prices for projects with certain characteristics, such as their technology, location or size.

However, perhaps the most significant change is the expansion of DESNZ's "peeking powers" beyond offshore wind, extending to solar, onshore wind and floating wind.

These powers give officials the ability to view anonymized bids to allow projects that breach an initial cap to proceed. They were used for the first time in AR7, resulting in the offshore wind budget nearly doubling from £900 million/year to £1.78 billion/year.

Underscoring the government's commitment to keeping costs down, Shanks said there should be "no assumption that the AR8 budget will increase as the AR7 one did."

Still, the broader use of the peeking powers puts greater emphasis on cost competitiveness, according to Nick Hibberd, policy manager at trade association RenewableUK.

Hibberd said the government may look to repeat its tactic from AR7 by setting a lower budget than it is prepared to fund, to drive down bid prices.

"If you have a lot of competitively priced projects, I don't see a reason why Treasury and DESNZ won't go big in terms of procurement," Hibberd said in an interview. "Depending on prices, you could really see a bumper auction."

The AR8 budget will be published sometime between Sept. 17 and Nov. 19, depending on the level of applicant appeals. The weeklong bid window will open before year-end, with the results due around two months later.

Tight 2030 timeline

The UK has awarded CFD support to over 54 GW of renewables capacity since 2014, including more than 33 GW of offshore wind, a technology central to the government's 2030 clean power plan.

The plan envisages between 43 GW and 50 GW of offshore wind in operation by 2030. CERA analysts estimate that 35.5 GW is already operational or committed under CFD contracts.

More than 17 GW of offshore wind projects are eligible to bid in AR8, according to RenewableUK's EnergyPulse database. This includes four projects involving Germany's RWE AG, the biggest winner from AR7, as well as others led by SSE PLC, Jera Nex BP and TotalEnergies SE.

Delivery of successful AR8 projects by 2030 may prove challenging, given the typical four- to five-year window between CFD signing and full commissioning for offshore wind projects. But observers said even partial commissioning by 2030 would be sufficient.

"What is entirely conceivable is that the projects could be in construction, and maybe even starting first power, by the end of 2030," said Jonathan Cole, executive chair of offshore wind foundation company Neretek, adding that this would represent "massive progress."

Meanwhile, Andrews told Platts that an auction which "maintains high deployments into the early 2030s would still be viewed as a success overall."

For onshore wind and solar, analysts are optimistic about competitive tension and delivery timelines. Solar awards hit a record 4.9 GW in AR7, while onshore wind reached 1.3 GW, its second-largest volume in CFD history.

For AR8, the technologies have been separated into distinct auction pots for the first time.

"That is a signal in itself that DESNZ are pretty confident it's a strong pipeline because you'd be worried about the liquidity of splitting out those technologies if there wasn't a competitive stack," Hibberd said.

Andrews said the change "reduces the risk of one technology crowding out the other," adding that the introduction of a third delivery year for both onshore wind and solar should also "broaden the eligible project pool quite considerably."

Policy continuity

AR8 begins amid an overhaul in the UK's political landscape. As Burnham becomes prime minister, Energy Secretary Ed Miliband is also tipped for a new role in the cabinet, most likely as foreign secretary, according to media reports.

While Miliband's tenure at DESNZ is viewed favorably by industry players, a ministerial reshuffle is unlikely to derail the government's clean energy agenda.

"What matters more is what the overall energy policy strategy is of government, rather than who the individual ministers are," said Cole, who previously led Iberdrola SA's offshore wind business and most recently was CEO of developer Corio Generation Ltd.

The executive said a Burnham government is likely to maintain the previous administration's focus on energy security, energy independence and cost reduction. "All of those things would suggest that the overall energy strategy is going to largely stay on track," Cole said in an interview.

The biggest unknown for AR8 remains the impact of geopolitical instability, particularly the war in Iran, on supply chain and construction costs, according to Hibberd.

"If that is really much more acute than expected, then ... the prices might get to a level where government actually has to just procure fewer projects than they would have hoped for," Hibberd said.

Still, it will be "hard to derail the auction in a catastrophic way," Hibberd added, pointing to the failed Allocation Round 5 in 2023, which did not receive a single bid from an offshore wind project due to rising capital costs. "I'd say the industry is pretty bullish on what [AR8] can deliver."