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Assessment of draft Contracts-for-Difference strike prices and contract terms

Oxera’s analysis suggested that the proposed CfD strike prices and contract terms were a less attractive investment proposition than the existing Renewables Obligation (RO) support mechanism, being approximately £15/MWh too low for both onshore and offshore projects commissioning in 2016/17 without any changes to the proposed contract terms. Moreover, the expected financial returns for onshore and offshore generation projects were significantly lower than the hurdle rates for these technologies identified as needing to be met by the Department of Energy & Climate Change. The financial impacts of varying contract terms to address the consequent likely shortfall in deployment of wind generation were also calculated, including lengthening the CfD term to 20 years and indexing the strike price to RPI.

Oxera further assessed the impact of the proposed decreases in strike prices between 2016/17 and 2018/19, and concluded that these decreases were inconsistent with the consensus view of likely unit cost reductions. This would significantly worsen the investment case for projects commissioning in 2018/19. Finally, Oxera considered the likely rate of learning and associated cost reductions consistent with the low rate of offshore wind deployment envisaged in the draft EMR Delivery Plan. This suggested that expected returns to investments in Round 3 offshore wind projects would be approximately zero, given the proposed strike prices and contract terms.

For further information on this report contact Jostein Kristensen or Peter Hope.

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