CfD Stakeholder Bulletin — 20 September 2019

What changed

On 20 September 2019, BEIS announced the results of CfD Allocation Round 3. Twelve renewable electricity projects won contracts totalling 5.8GW of new capacity, up from 3.4GW in Round 2 (2017). All projects are scheduled to deliver by 2025. Successful technologies were offshore wind, advanced conversion technologies (ACT), and remote island wind.

The headline result was offshore wind. Six projects won contracts at strike prices between £39.65/MWh and £41.61/MWh (2012 prices) — a 30% reduction from Round 2's £57.50/MWh and roughly 65% below Round 1's £114-£120/MWh range. At these prices, offshore wind cleared below the prevailing wholesale electricity price for the first time, raising the prospect that CfD holders would be paying back into the system rather than drawing from it — at least at the point of contract award.

What this means in practice

For consumers, the immediate signal was positive: competitive auction pressure drove strike prices down dramatically. The Levy Control Framework cost of Round 3 was projected to be substantially lower per MWh than previous rounds. But the commitment is long-term. Each CfD is a 15-year contract. These 12 projects lock in administered price guarantees through to 2040, during which consumers bear the difference between the strike price and the wholesale reference price — in either direction.

For developers, the round confirmed the CfD as the route to market for large-scale renewables. The six offshore wind projects — Hornsea Three (2.4GW), Dogger Bank A, B, and C (3.6GW combined across Rounds 3 and 4), East Anglia ONE North, and others — represented industrial-scale capital deployment underwritten by government price guarantees. The strike prices were low enough to suggest genuine cost reduction in offshore wind, but they also reflected developers' willingness to accept thin margins in exchange for 15 years of revenue certainty and zero merchant risk. A CfD eliminates price discovery for the contracted volume. The developer no longer responds to wholesale price signals — they produce whenever they can, because the strike price is paid regardless of system conditions.

For the wholesale market, 5.8GW of price-insensitive generation entering by 2025 meant a significant expansion of volume that does not respond to scarcity or surplus signals. Offshore wind produces when the wind blows, and a CfD generator has no incentive to curtail when prices go negative — indeed, under the original CfD terms, generators continued to receive the strike price even in negative price periods (a provision later amended for subsequent rounds). This contributes to the cannibalisation effect: more subsidised renewables depress wholesale prices, which increases the gap between the strike price and the reference price, which increases the levy cost to consumers. The seen cost was a low strike price. The unseen cost was the market distortion that a low strike price on an administered contract creates over 15 years.

The 5.8GW figure needs context. This is nameplate capacity, not firm power. Offshore wind operates at load factors of 40-50%, so 5.8GW of capacity delivers roughly 2.3-2.9GW of average output. The "7.2 million homes" figure in the bulletin is a peak-capacity equivalence that overstates the contribution to reliable supply. No grid operator plans on the basis that 5.8GW of wind will be available when needed.

ACT and remote island wind were minor components by capacity but significant as precedent. Advanced conversion technologies (energy-from-waste gasification) won contracts at substantially higher strike prices than offshore wind, raising the question of whether the pot structure — which separates "established" from "less established" technologies — was allowing higher-cost projects to avoid direct competition with cheaper ones.

What happens next

Round 3 results committed BEIS to managing the delivery of 12 projects through to 2025, including milestone tracking, contract execution, and monitoring of the Supplier Obligation that funds the levy. The immediate next steps were:

- Contract signature: Successful applicants had 10 working days to sign CfD contracts with the Low Carbon Contracts Company (LCCC), the counterparty body. - Milestone delivery: Each project faced a Milestone Delivery Date (typically 12 months post-signature) requiring evidence of financial commitment, and a Target Commissioning Date by which generation must begin or the contract lapses. - Round 4 planning: BEIS signalled that future rounds would run more frequently, moving toward annual allocation rounds from Round 4 onwards. This was confirmed in the 2020 Energy White Paper and Round 4 eventually ran in 2022. - Negative pricing reform: The experience of Rounds 1-3 fed into reforms for subsequent rounds, including changes to how CfD payments interact with negative wholesale prices — an acknowledgement that the original contract design created perverse incentives during periods of oversupply.

The broader trajectory was set: CfDs would become the dominant route to market for renewables in GB, with each successive round locking in further tranches of long-term administered price commitments funded by consumer levies. Round 3 was the moment the mechanism proved it could deliver volume at scale. Whether that volume was being delivered at the right price, to the right locations, and with the right incentive structure remained — and remains — an open question.