DECC announces draft CfD budget, gets program approval from EC

By Erin Voegele | July 24, 2014

On July 24, the U.K. Department of Energy and Climate Change announced that starting in October, renewable energy projects in the U.K. will complete for a budget of more than £200 million ($339.7 million) as part of the government’s reforms to the electricity market. The funding is the first allocation round for the new Contracts for Difference (CfD), a subsidy program that aims to provide long-term certainty and reduce risk for investors. The DECC’s announcement came one day after the European Commission announced its determination that the CfD program is in line with EU state aid rules.

In a statement, Energy and Climate Change Secretary Ed Davey noted that renewable energy projects will have to bid competitively for contracts. The DECC has also indicated that it is signaling that at least an additional £50 million is expected to be available for an auction round in 2015, with a total of approximately £1 billion potentially available later for further projects up to 2020-’21.

“Our plan is powering growth and jobs as we build clean, secure electricity infrastructure for the future. By radically reforming the electricity markets, we’re making sure that decarbonizing the power sector will come at the lowest possible cost to consumers,” Davey said.

According to the DECC, the CfD budget will be split between up to three technology groups. The first group includes established technologies, such as wind and solar, energy from waste with combined-heat-and-power (CHP), landfill gas and sewage gas. The second technology group includes less established technologies, such as offshore wind, anaerobic digestion and dedicated biomass with CHP. The third technology group is dedicated to biomass conversions. Contracts will be allocated competitively within each group.

Within its announcement, the DECC stressed that the draft budget is subject to change and that final budgets are expected to be confirmed in September. The draft budget notice includes expected annual budgets for the first two technology groups, which are focused on established and less established technologies. 

Within the notice, the DECC states  it is “not at present intending to release further budget for biomass conversion, beyond the funding that is allocated through the [Final Investment Decision Enabling for Renewables (FIDeR)] process.” The Drax Group plc unit #1 biomass conversion, the Lynmouth Power Ltd., biomass conversion and the Teesside dedicated biomass with CHP project are among the projects that have received subsidy under the FIDeR process.

In a supporting document, however, the DECC indicates the decision not to budget for the technology group dedicated to biomass conversions in the upcoming 2014 allocation round does not imply that the DECC would not release a budget in future rounds for biomass conversions. “Our current decision is made purely for overarching budgetary reasons,” the DECC said. For the 2015 allocation round, the DECC said it has not yet decided on an indicative budget for the technology group.

The European Commission’s July 23 announcement specified the CfD scheme will run for 10 years starting April 2015 with a budget of about £15 billion. Selected individual projects will be able to receive support for up to 15 years. With regard the to the biomass conversion technology group, the European Commission announcement said the group will be supported through dedicated tenders up to 2017. After that, the U.K. will evaluate whether biomass can be included in the common tenders for established technologies.

The U.K.-based Renewable Energy Association has weighed in on the DECC’s announcement, calling it surprising that the government would allocate three times the funding to less-established technologies than to established technologies while leaving biomass conversions out entirely even though established technologies and biomass conversions could immediately plug the looming capacity crunch with low carbon generation whilst ensuring value for money for the consumer.

“The limited funding for several key technologies will send shockwaves through the industry. It’s really important not to lose sight of the bigger picture today. Ultimately all renewables, not just in power but in heating and transport too, are really competing with fossil fuels that are mostly imported from overseas and damage the climate,” said Nina Skorupska, chief executive of the REA.

“With many people struggling with their energy bills, cost-effectiveness is every bit as important, and DECC cannot say that this planned budget delivers value for money for the consumer. The best way to square the circle is by properly funding the cheaper technologies and introducing minima for all technologies. This will ensure continued investment, innovation and job creation across all sectors, whilst also bringing forward cheaper clean power in the short term to address the looming capacity crunch,” Skorpska said.