Renewables CfD budget increased: comment & analysis

“There’s misunderstanding over what the so-called ‘budget’ for CfDs actually is. It’s based on unrealistic Treasury electricity price projections that are lower than experts suggest. The next auction is likely to secure enough offshore wind to save £30-40 per year on every household's energy bill in the event of a future gas crisis.

"During the energy crisis, households saved around £20 from CfDs already in place. CfDs act more as a price stabiliser, ensuring prices can’t shoot up to super high levels. And with North Sea output in decline, irrespective of new drilling licences, every new wind farm means the UK is much less dependent on foreign energy imports. Wind farms make many times more of a difference to UK homegrown energy than does new drilling.”

New analysis from the ECIU has found that securing 5GW, just half of the offshore wind that is ready and waiting in the pipeline, could save the average household £30-40 per year in a future gas crisis. [1] During the last few years of high gas prices, CfDs have saved households around £20. [2] It could also lower our gas demand by around 10% in 2030, and our gas imports by at least 12%. [3]

This year's CfDs auction could secure between 4GW and 6.5GW of offshore wind capacity, depending on the prices that the developers bid, out of 10GW of projects that are eligible to enter. [4] This suggests that obtaining 5GW could be a reasonable prospect. If the other 5GW of capacity could be secured, then then benefits would be doubled.

The OBR has modelled a scenario whereby the UK experiences a gas price crisis similar to today's once a decade, and found that it could add 13% GDP to public debt by 2050. [5]

Notes to editors:

1. This ECIU analysis applied a simple model of the current gas crisis recurring once a decade, with the following wholesale power prices (in £/MWh, in 2024 prices): 200 for 1st year, 150 for 2nd year, and 100 for the 3rd and 4th years; and 70 in all other years as per forecasts for the early 2030s. Two such crises are included in the course of 15year CfD contracts commencing in the late 2020s. The costs or savings for each year were calculated using a range of strike prices (see below) that reflect recent inflation in the sector (caused partly by the gas crisis).

2. Ofgem found that during the gas crisis, CfDs saved households around £20 on their annual energy bill: https://assets.publishing.service.gov.uk/media/65ef6694133c220011cd37cd/review-electricity-market-arrangements-second-consultation-document.pdf

3. Avoided gas demand and gas imports are estimated on the basis of the UK's gas power plant fleet having an overall efficiency of c.45% in 2030, such that every 1GW of new offshore wind displaces 12TWh/yr of gas. Comparisons with gas demand use National Grid's Future Energy Scenarios 2024, and comparisons with gas imports also use the NSTA's projections of North Sea gas production (along with the assumption that the UK continues to export c.20% of its production).

4. Capacity of offshore wind that could be secured within AR cap of £1.1bn is estimated as follows (in 2012 prices): 1GW with a load factor of 63% generates 5.5TWh/yr; market reference price of £24/MWh and strike price at the limit of £73/MWh give CfD value of £270M/yr, allowing capacity of 4GW within the cap. If strike prices were lower, at £55/MWh , then the capacity would be 6.5GW. Prices in 2024 values are obtained by applying an inflation factor of c.1.40.

5. The OBR assessed the economic impacts of a gas crisis recurring once a decade, starting in the late 2020s: Fiscal risks and sustainability – July 2023 (OBR, 2023).

For more information or for interview requests:

George Smeeton, Head of Communications, ECIU, Tel: +44 (0)7894 571 153, email: george.smeeton@eciu.net