Energy UK Explains: Allocation Round Six

Key points

• The Contracts for Difference scheme has been key to the expansion of cheap, homegrown renewables by bringing investors certainty, and lowering the cost of capital.
• The results of the sixth Allocation Round (AR6) show that the auction procured 9.6GW of clean energy capacity from technologies such as offshore wind, onshore wind, and solar.
• This is enough capacity to power 8 million homes, and represents private sector investment of at least £20bn in the UK economy providing jobs, skills, and growth across the country.
• AR6 marks a recovery from the previous round (AR5), which failed to secure any new offshore wind projects due to unrealistic pricing assumptions. The successful outcome of AR6 demonstrates the effectiveness of government and industry collaboration in resolving these issues.
• Today’s results show that the CfD scheme is back on track, and that despite global supply chain pressures, renewables can continue to beat price expectations.
• The projects awarded in AR6 are crucial for the UK’s goal of clean power by 2030. They will ensure our energy security, lower emissions, and contribute to a cheaper renewables driven energy system.
• Achieving the 2030 clean power target will require a diverse mix of technologies beyond wind and solar, including nuclear, hydrogen, carbon capture, floating offshore wind and tidal power, as well as storage solutions, interconnectors and demand-side response.
• Building on AR6’s success will mean delivering next year’s auction on time, and maintaining an auction design that ensures both investor confidence and value for consumers.

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The context for Allocation Round 6 (AR6)

• The Contracts for Difference (CfD) scheme is the cornerstone of the UK’s clean energy strategy. Since its introduction in 2014, the CfD programme has played a key role in derisking investment, bringing down the cost for renewables such as offshore wind, and cementing the UK as a global leader in this technology.
• AR6 is the sixth major auction round for renewables under the CfD programme. Due to unrealistic pricing assumptions not representative of market fundamentals – parameters that were adopted despite industry’s concerns – the previous auction (AR5) failed to bring forward any new offshore wind projects.
• In July, the Government announced an increase in the budget for AR6; an increase of £500 million for a total budget of over £1.5 billion.

What do these results mean?

• Allocation Round 6 awarded contracts for 5GW of offshore wind, 1GW of onshore wind and 3GW of solar. This is a record-breaking amount of solar capacity procured, a technology that can be delivered quickly alongside immediate benefits for consumers in terms of cheaper bills.
• AR6 also procured 400MW of floating offshore wind and 28MW of tidal stream, showing that the CfD programme continues to derisk earlier stage technologies that have the potential to offer huge opportunities in the future. The floating offshore wind project is set to be the largest in the world, cementing the UK’s head start in this potentially transformational new technology.
• This will contribute significantly to the UK’s energy security and take us a step closer to our clean power goals. The electricity that these projects will generate is enough to:
  • Produce the same amount of electricity every year as the demand of 8 million homes
  • Displace gas used for electricity generation by 46GWh, more than the amount of LNG the UK imported from Qatar in 2023
  • Have saved over £2.5 billion if it were operating at the peak of the energy crisis
• At the same time, this new capacity represents at least £20 billion in investment, creating jobs and opportunities throughout the country, and supporting British manufacturing through the supply chain.

Figure 1: Capacity procured in AR6

Figure 2: Outcomes of offshore wind, onshore and solar from previous allocation rounds

What does this mean for clean power in the UK?

• The results from AR6 show the CfD programme is back on track after the failure of AR5. It demonstrates the power of industry and government working together to identify and fix problems so that we can ensure the level of private sector investment required for a clean power system.
• For offshore wind in particular, the projects awarded through AR6 mean that the blip in the rollout caused by AR5 will not turn into a longer-term hiatus that would damage the supply chain. Shutting off and starting up the offshore wind sector would have increased costs and amidst growing supply chain competition, made it harder to build the capacity we need.
• The new projects that AR6 will deliver are a key stepping stone towards the UK’s target for clean power by 2030.
• This will require a different mix of technologies on the system, how much depends on how electricity demand changes and the precise nature of the clean power target, which must be achievable whilst ensuring that the lights stay on.
• Wind and solar are not enough to achieve clean power. A wide variety of technologies will be required, including:
  • Nuclear: provides low-carbon, reliable power 24 hours a day. Hinkley Point C is already under construction and will provide 3.2GW of clean power. Its sister plant, Sizewell C should join later in the 2030s – subject to a positive Final Investment Decision – potentially alongside a new fleet of modular reactors. Low-carbon generation: hydrogen, gas with carbon capture and storage, and biomass will complement renewables as they can be readily turned on and off to fill in the gaps made by weather patterns. Flexibility: electricity storage, interconnectors that trade electricity with our European neighbours, and demand side response from consumers using more or less electricity depending on what the system is producing will help us make the most of the electricity we have available.
  • Emerging technologies: continuing to develop floating offshore wind, tidal, geothermal and other types of electricity generation will provide more options in the future, strengthen our energy security through a diversity of key generation technologies, and provide the chance for the UK to lead in the growth industries of tomorrow.

What needs to happen now

• As Energy UK set out in its “Mission Possible” recommendations for the new Government, building the mix of technologies to deliver a clean power system requires the Government to act in the following areas:
  • Future allocation rounds: future allocation rounds – especially in the next few years – must continue to deliver increasing quantities of renewables. This can be achieved by setting sufficiently ambitious budgets as well as bringing forward incremental reforms to make the CfD work better. AR6 shows that the CfD is fit for purpose; profound changes to the CfD auction design are likely to cause more problems than they solve.
  • Drive forward investment outside of the allocation rounds: not all clean power is delivered through Contracts for Difference. Onshore wind and solar can now sometimes be developed without support and this should be encouraged. The investment frameworks that facilitate investment in nuclear, carbon capture and storage (for both gas and biomass) and Long Duration Energy Storage should be used to accelerate the development of these other parts of a clean energy system.
  • Grid: it must be quicker and easier to connect to the grid and the capacity of the grid must be expanded so we can move electricity from where it is made to where it is needed. Work is ongoing to achieve this. At a minimum, the Government should work to adopt the Winser review proposals in full.
  • Planning: the Government should continue its good work in planning reform by making it easier to work with communities to get planning permission for the generation and networks needed for a clean power system.
  • International co-operation: working more closely with the EU will allow us to build more interconnectors and to operate the ones we have more efficiently.
  • Focus on the demand-side: energy efficiency and the electrification of heat and transport will both reduce demand for energy and, by using EVs and heating flexibly, create a more adaptable, resilient system.