UK heads for politically charged CfD round

• Reform has warned developers about the risks of bidding in AR7 next month
• The party said it may cancel AR7 contracts if it wins influence in 2029 election
• Labour has set out a series of changes for AR7 to improve certainty

The UK is set for the most politically charged Contracts for Difference (CfD) allocation round to date.

Next month, the UK Government is set to open the latest allocation round for its CfD regime, with results due in late 2025 or early 2026. It has announced changes so it can improve certainty for developers, target support for viable projects, and keep energy costs low for consumers.

But AR7 is also attracting the ire of rival politicians.

Richard Tice, deputy leader of right-wing party Reform UK, which is gaining in popularity and currently commands support from around one quarter of UK voters, wrote to major utilities last Wednesday (16^th July) to warn them about the risks of bidding in AR7. The recipients included Equinor, Octopus, Ørsted, Scottish Power, SSE and Vattenfall.

He wrote: “The renewables agenda no longer enjoys cross-party support. As a result, your participation in the UK Government’s upcoming Contracts for Difference Allocation Round 7 (AR7) – and any future auctions based on the Clean Power 2030 framework – carries significant political, financial, and regulatory risk for your shareholders.”

Tice added that Clean Power 2030 targets impose “intolerable costs on taxpayers, households, manufacturers, and the broader economy” and lead to “soaring energy bills, industrial decline, the imposition of intrusive infrastructure, and the erosion of national energy security”.

As a result, he said Reform UK would reassess net-zero policies in the UK and strike down AR7 contracts if it won support in the next UK election, due in 2029.

He wrote: “Let me be clear: if you enter bids in AR7, you do so at your own risk. The political consensus that has sheltered your industry for nearly two decades if fracturing. Reform UK will not be bound by the assumptions or commitments of this failing Labour government… Prospective investors in the UK’s Net Zero economy would be wise to take note.”

It is true that support for renewable energy may come under pressure if Reform UK wins power and influence in 2029, but the threat to AR7 contracts should not overly concern investors. CfDs are private law contracts signed between winning developers and the Low Carbon Contracts Company, which means developers could sue if a future government wants to stop the deals. This is unlikely to diminish the appetite from companies to bid in AR7, but they will surely analyse contracts more rigorously to close loopholes.

But Reform UK’s intervention is a counterpoint to attempts by the Labour government to make the CfD regime more appealing for AR7.

Labour’s AR7 changes

On 15^th July, the UK Government announced changes for AR7 after feedback during a month-long consultation process that ended on 21^st March. The Government pledged to increase certainty for developers and reduce costs for consumers with steps including:

• Flexibility around AR7 budget size: The Government will share information about allocation round budget sizes before bids close. However, it said that it would reserve the right to increase the budget for the offshore wind sector by assessing bids for projects that might narrowly miss out after bidding closes.
• Stop developers re-bidding for previously-won support: Some developers have used recent allocation rounds to re-bid on more favourable terms for new CfDs for capacity won in previous rounds. The Government is looking to ensure CfDs are used to support new capacity and not used as a tool for developers to re-bid on better terms for previously-won capacity. It plans to continue this policy in AR8 to encourage realistic bidding and improve certainty for projects.
• Fixed-bottom projects do not require full planning consent: Developers will be able to bid for support for fixed-bottom offshore wind projects that do not yet have full planning consent. The Government said this would help increase the pool of eligible projects and boost competition to deliver lower power prices.
• CfD lengths will be increased to 20 years: The Government said it would offer longer-term certainty for wind and solar projects by increasing the length of CfDs from 15 to 20 years, and so help them reduce strike prices. Official figures said the move would reduce the cost of CfD support between 2030 and 2045, while giving developers more visibility to mitigate short-term power price volatility.
• Repowered and floating wind projects: The Government said onshore wind repowering projects would be able to bid for CfD support; and also that floating wind test and demonstration projects could bid for CfD support to give projects a route to commercial deployment of the technology in UK waters.

All these changes are likely to give developers greater flexibility, which could be vital as the industry continues to grapple with supply chain challenges and slim profit margins.

That should boost competition regardless of the uncertainty Tice and his colleagues are seeding.