CfD Stakeholder Bulletin — 31 July 2024

What changed

DESNZ increased the AR6 CfD budget from roughly £1 billion to over £1.5 billion — a 50% uplift announced on 31 July 2024, four months after the initial March allocation. The increase was spread across all three pots: offshore wind rose by £300m to £1.1bn, established technologies (onshore wind and solar) rose by £65m to £185m, and floating offshore wind and emerging technologies rose by £165m to £270m, with £15m ringfenced for tidal stream.

The bulletin's own framing is revealing: "Offshore wind has more budget available to it in AR6 than all of the previous CfD rounds combined." That is presented as a strength. It is also a concession that the administered price mechanism requires ever-larger budget envelopes to attract the same capacity that AR4 secured at a fraction of the cost.

What this means in practice

For developers: A larger budget means more headroom for strike prices to clear at levels that reflect actual project costs. AR5 attracted zero offshore wind bids because the administrative strike price cap was set below the level at which projects were financeable. The budget increase does not directly fix this — strike prices are still set by competitive auction within an administratively determined ceiling — but a larger pot reduces the risk that viable bids are crowded out by budget constraints. The signal to developers is: we want bids, and we are prepared to pay for them.

For the supply chain: The £270m emerging technology pot, up from £105m, is the most significant shift in percentage terms (a 157% increase). Floating offshore wind projects — Celtic Sea, in particular — now have a credible route to contract. The £15m tidal stream ringfence continues the pattern established in AR4 and AR5 of shielding tidal from competition with cheaper technologies, effectively guaranteeing contracts for any qualifying project that bids.

For consumers: The entire cost falls on electricity bills via the supplier obligation. The bulletin does not estimate the per-unit impact, but £1.5bn in budget translates to roughly £1.5-2bn in total contract costs over 15-year CfD terms, depending on reference price evolution. This is not a one-off fiscal allocation — it is a commitment to pay the difference between the strike price and the wholesale reference price for every MWh generated across the contract lifetime. If wholesale prices fall, the cost to consumers rises. If wholesale prices rise above the strike price, generators pay back. The asymmetry is that DESNZ controls the budget but not the wholesale price trajectory that determines the net cost.

For the pricing mechanism itself: Nothing changes structurally. The CfD remains an administered price guarantee allocated by auction within government-set parameters. AR5 failed because the administrative price cap (£44/MWh for offshore wind in 2012 prices) was below the level at which projects could be financed, given supply chain inflation, higher interest rates, and increased development costs. The response — increasing the budget — treats the symptom (insufficient bids) rather than the cause (a price cap that did not reflect costs). A larger budget with the same price-setting mechanism can still produce a zero round if the cap remains too low. The budget revision notice, referenced but not included in the bulletin, is where the actual parameter changes would be specified.

The numbers in context: AR4 (2022) cleared 10.8 GW of offshore wind at £37.35/MWh (2012 prices). AR5 (2023) cleared zero. The difference was not budget — it was the strike price ceiling relative to project costs. AR6's budget increase is necessary but not sufficient. The question is whether the administrative price cap has also been adjusted upward to reflect the cost environment. The bulletin is silent on this, which is itself informative: budget announcements are politically easy (more money for clean energy); price cap increases are politically difficult (higher bills for consumers).

What happens next

AR6 was expected to open in late 2024 with results in 2025. The budget revision positions the round to attract bids, but three things determine whether it succeeds:

1. The administrative price cap. If DESNZ has also raised the maximum strike price for offshore wind (published separately in the allocation framework), AR6 should clear. If the cap remains at or near AR5 levels, the budget increase is irrelevant — developers will not bid below their cost of capital regardless of how large the pot is.

2. Supply chain commitments. AR6 includes supply chain plan requirements. Developers must demonstrate UK content commitments to qualify. The interaction between supply chain obligations and strike price competitiveness is a binding constraint: mandatory UK content increases project costs, which requires higher strike prices, which increases consumer costs.

3. Reference price trajectory. CfD costs are the difference between the strike price and the wholesale reference price. With GB wholesale prices falling from their 2022 peak, the net cost of new CfD contracts is rising. A £73/MWh strike price costs consumers nothing when the reference price is £80/MWh; it costs £23/MWh when the reference price is £50/MWh. DESNZ is committing to contracts whose cost depends on a wholesale price path it does not control.

The broader pattern is clear: each failed or undersubscribed round produces a larger budget allocation for the next round, without revisiting the fundamental question of whether an administered price mechanism can track market conditions in real time. The budget is the variable DESNZ can change without admitting the price cap was wrong. It is the path of least political resistance, and consumers will pay for it across a 15-year contract term.