The Energy Transition | Core documents published for Contract for Difference Allocation Round 7

This week's edition reports on the Department for Energy Security and Net Zero's publication of administrative strike prices for Allocation Round 7 and a "clean flexibility" roadmap, Ofgem's proposals on locational transmission charges, and the government's sign-off of investment in Sizewell C nuclear power plant.

Strike prices published for Contract for Difference Allocation Round 7

The Department of Energy Security and Net Zero (DESNZ) has published the standard terms and conditions,  allocation framework and administrative strike prices (ASPs) for Allocation Round 7 (AR7), following its announcement earlier this month of further reforms to the Contracts for Difference scheme.

Administrative strike prices

ASPs represent the maximum price per megawatt hour (MWh) for generating electricity that a particular project type can receive. In the methodology note, DESNZ has confirmed that the methodology and assumptions for the AR7 ASPs is largely aligned with those in Allocation Round 6 (AR6). It has also confirmed that strike prices will be in 2024 prices, rather than the 2012 prices which have been used since the CfDs inception.

On the whole, the ASPs across all technologies are similar to those under AR6. However, the most notable changes include (with all listings in 2024 prices) fixed-bottom offshore wind ASP increasing by 11% from £102/MWh in AR6 to £113/MWh in AR7; a minor increase for onshore wind to £92/MWh from £89/MWh; a 12% decrease in solar from £85/MWh to £75/MWh; and a 10% increase for floating offshore to £271/MWh from £245/MWh.

The ASPs are a maximum and it is likely these technologies will clear at lower strike price. The "remote island wind" projects are also being treated separately from other offshore wind projects and have a separate ASP allocated to them (£66) and, therefore, will clear at a different strike price.

The price changes will also be accompanied by the extended 20-year CfD contract period for these technologies, up from 15 years previously. The changes are expected to reduce the "merchant tail" revenue risk, meaning projects are likely to be able to obtain longer debt terms given the increased certainty of revenues over time; as a result, it is hoped this will bring down the strike prices compared to a 15-year term.

Pot structure

AR7 will use a four-pot structure. Both fixed-bottom offshore wind and floating offshore wind will be placed into their own pots (pot three and four respectively). All other technologies are split between pot one and pot two, with the more established technologies featuring in pot one (that is, onshore wind, solar and hydro).

The allocation rounds for all pots will be the same at the start of the CfD process but will diverge after the bidding window closes. Budget notices will be issued between 6 October and 8 December and bidding windows will open between 21 and 27 October (fastest tracks) and 5 and 9 January (slowest tracks).

AR7 results

Results for AR7 (pot 3 and pot 4) will be sent to applicants between 9 December and 26 February. For AR7a (pot 1 and pot 2) results will be sent to applicants between 21 November and 9 February.

'Clean flexibility' roadmap sets out government vision for future electricity system

The Department for Energy Security and Net Zero (DESNZ) has published its roadmap for a cleaner, more flexible electricity system to maximise the use of energy infrastructure to minimise consumer bills.

Developed by the government, Ofgem, and the National Energy System Operator (NESO), working alongside industry stakeholders and consumer groups, the "clean flexibility" roadmap builds on the Clean Power 2030 Action Plan to deliver the government's "clean energy superpower" mission. The government aims to achieve clean power by 2030 and net zero by 2050. This is the first time the three primary public bodies in the energy sector have collaborated on a strategy to delivery flexibility.

The roadmap's central message is that, due to the intermittent nature of renewables, flexibility is required for a reliable, low-cost and consumer-driven electricity system and to reduce reliance on international fossil-fuel markets. Clean flexibility is "the ability to shift in time or location the demand or supply of electricity…while reducing emissions". It relies on measures including consumer-led flexibility, battery storage, interconnectors, long-duration electricity storage and low-carbon dispatchable power. The mix of these measures is intended to balance the grid, maximise the use of low-cost renewables and provide resilience during periods of low generation.

The roadmap sets out how the government intends to achieve this required flexibility by changing market arrangements, building necessary infrastructure and ensuring customers can access opportunities to deliver flexibility at the scale it is needed.

Four sections

The roadmap is split into four sections. Short-duration flexibility includes consumer-led flexibility, grid-scale batteries, and interconnectors. Long-duration flexibility includes long-duration electricity storage and low-carbon dispatchable power. Cross-cutting enablers to support delivery that include market reform, network upgrades, digitalisation, and improvements to planning and supply chains. And a governance framework to establish clear accountability for delivery.

Broad, long-term priorities to accelerate the growth of flexibility capacity are accompanied by short-term milestones committing named organisations to specific, timebound actions, with progress monitored through the governance framework.

Carbon-intensive dispatchable power (for example, unabated gas) and non-dispatchable power (for example, wind and solar) have been excluded, as the roadmap focuses on clean flexibility. The outlined changes are likely to benefit short-term technologies such as batteries and consumer-led flexibility and also those with longer-term deployment potential (that is, pumped hydrogen and other long-duration energy storage).

Kayte O'Neill, the chief operating officer of NESO, said: "The journey towards a decarbonised system will bring opportunities for industry and consumers if we can solve the challenges of using the system flexibly. This roadmap provides clear direction for that, setting out the actions needed to increase flexibility across Great Britain and the rewards it will bring".

The roadmap states that as the market is evolving rapidly, it marks only a starting point – and the government, Ofgem, and NESO will take further action if required to protect and work in the best interests of consumers.

Ofgem proposes linking locational transmission charges to strategic energy plans

Ofgem has published an open letter on network charging reform addressed to the UK government that sets out its proposals to make transmission charges more predictable for stakeholders. The letter comes after the government announced its Review of Electricity Market Arrangements (REMA) Summer Update on 10 July, in which it opted to reform the existing national pricing system rather than adopt zonal pricing.

One proposal centres around how network charging signals, including the transmission network use of system (TNUoS) and associated connection charges, could be reformed to improve alignment with spatial energy and network planning. In particular, the regulator notes how network charges could send effective locational signals that encourage generation investment in accordance with national and regional strategic energy network planning.

Ofgem highlights several ways in which network charging signals could achieve this proposal.

• Incentivise the siting of generation assets in line with strategic plans. Ofgem suggests that a reformed TNUoS methodology could guide investment into areas identified within both the Strategic Spatial Energy Plan and Centralised Strategic Network Plan. Further investment could be achieved through network charges reflecting the availability of grid capacity appropriate to the level in which customers want to connect to the grid year-on-year. This has the potential of further encouraging assets to site in areas where spare capacity is expected, thereby reducing unnecessary constraints.
• Improving the predictability of network charges. Unpredictable and volatile charges can hinder investment – Ofgem proposes reviewing TNUoS at the point of investment to make network charges more predictable for investors and to further provide more effective investment signals.
• Encouraging efficient siting of demand and storage projects. While further analysis of potential benefits to locational charging incentives is required, Ofgem considers that there may be benefits from these incentives that may encourage the siting of demand and storage projects closer to generation. This could create a more efficient utilisation of expanded grid capacity in future.
• Reforming the charging regime for existing assets. Ofgem also propose that options to transition to a reformed charging regime should be considered for existing assets. This would require careful consideration as many existing forecasts are already factored into approved investment decisions. Options for existing assets could include a phased reform to charges, or alternatively fixing charges to apply at a certain level once established reforms have been implemented.

Ofgem intends to work closely with government and NESO to ensure that any pricing changes are implemented in alignment with wider initiatives set to come about in the wake of the REMA decision.

Sizewell reaches its final investment decision

The UK government has confirmed that it has signed off the final investment decision for the Sizewell C nuclear power plant.

The government has also confirmed that it will take an initial stake of 44.9% (making it the largest shareholder), with the remainder of the shares being held by private investors.

Alongside the equity investments, there will be significant debt financing, a large proportion of which is to be provided by the National Wealth Fund, in its first nuclear investment.

The total capital raised by the combined equity and debt exceeds the target construction cost for the station, which is currently set at £38 billion in 2024 prices.

Sizewell C will use the "regulated asset base" financing model, under which the project will receive a regulated revenue which is drawn from a charge added to end-users' bills. The government has stated that the cost to consumers of the funding will be limited to around £1 per month during the project's construction. This model is similar to that used on the Thames Tideway project.

In reaching its decision, the government assessed the project's value and published its reasoning in the value for money assessment. This states that in all core scenarios that have been modelled, the government considers it likely that Sizewell C will reduce costs of a low-carbon electricity system and generate a positive return on the public investment. It estimates that Sizewell C could save the UK around £2 billion per year during its operational life.

This article was written with the assistance of Ellie Smyk, Imogen Drummond and Adam Budd, trainee solicitors.