The government recently announced an allocation of £60m to the third Contracts for Difference auction taking place later this year.
In February, the government announced an update to the third round of allocations for Contracts for Difference (CfDs).
CfDs support emergent technologies by shielding electricity suppliers from wholesale price volatility. The Low Carbon Contracts Company guarantees a ‘strike price’ with a generator, topping up payments when the wholesale price is below this amount and, vice versa, receiving the difference when prices are higher.
This ensures a consistent revenue, encouraging investment in newer technology that helps to reduce the cost of renewable and low carbon generation over time.
The amount of subsidy offered in the third CfD round – £60m a year in 2012 prices – is low, especially considering that the second round made £290m available per year.
Yet there's an ambitious cap of 6GW of capacity this round and an expectation from the government that they can do more with less.
The second CfD round raised 3.5GW of additional capacity, but the expected strike price for some technologies, like offshore wind, have fallen dramatically since.
Other generation methods present in both rounds, like advanced conversion technologies, biomass, tidal and wave, have also seen significant falls in expected strike price. A reduced subsidy might well be the case of good policy bearing fruit.
Emerging technologies need enhanced government support
For renewable generation, which suffers from intermittent provision of supply, to be more effective, there needs to be additional investment in improving and supporting emergent storage technology.
In our State of the Nation 2018: Infrastructure Investment report, ICE set out a policy recommendation that energy storage and other emerging technologies should receive enhanced government support through appropriate mechanisms, drawing on the successful impact of CfDs on the renewable energy market.
The government must embrace approaches that compliment renewable generation, making energy from renewables available around the clock. This means supporting the development of emerging battery storage solutions in step with investment in renewable generation.
This will be particularly important for generation methods like remote island wind. Applications will only be accepted for projects of under 5MW for this category, and by definition it's likely these will be deployed away from the centralised grid, meaning that storage is critical.
Storage of renewable power is crucial
The need to accelerate investment in storage to match the expansion of renewable power – which now makes up almost 30% of the UK’s generation capacity – is pressing. Without affordable storage providing back-up capacity, the contribution of renewables in replacing carbon fuels completely will be low.
Building that storage solution needs investment - and appropriate subsidy - to become affordable sooner, just as wind and solar generation have proven can be the case.
Private investment is far from lacking. Tesla’s Powerwall and similar home-based batteries are seeing increased usage, while UK Power Networks is working to ensure small-scale electricity storage is linked up.
Battery technology itself is even evolving with new types of storage, such as flow batteries and solid state batteriesthat could charge faster and last longer than existing lithium-ion types, being researched.
The capacity market, set up at the same time as CfD, was meant to support the development of storage as a contingency, yet only 6.1% of awards (3.2GW of storage) were supported in the last round and the scheme has stalled in the face of legal challenges.
Incorporating emergent storage technology and additional capacity into future CfD allocations, or establishing a scheme specifically to support emergent storage technology, is a must.
