CfD Stakeholder Bulletin — 6 March 2024

What changed

DESNZ confirmed a budget of over £1 billion for CfD Allocation Round 6, announced as part of the Chancellor's Spring Budget on 6 March 2024. This is the largest budget ever set for a CfD allocation round, exceeding the £205 million budget for AR5 (which itself was a step up from AR4's £265 million pot — though AR5's lower headline figure reflected tighter pot structures rather than reduced ambition). The budget sets the ceiling for how much annual subsidy cost DESNZ is willing to commit consumers to through new CfD contracts awarded in this round.

To be precise about what "budget" means here: this is not £1 billion of upfront spending. It is the maximum annual cost — measured as the difference between strike prices and reference prices — that AR6 contracts can impose on consumers in their most expensive year. The actual lifetime cost to consumers depends on where strike prices land relative to wholesale prices over 15-year contract terms. If wholesale prices stay high, CfDs pay back to consumers. If they fall, consumers pay the difference. The budget figure tells you the government's upper bound for annual exposure, not the total cost.

What this means in practice

For developers, a £1 billion budget means significantly more capacity can clear in AR6 than in previous rounds. AR5's budget constraints meant eligible projects competed intensely for limited allocation, particularly in offshore wind where strike prices were driven to levels that — as the AR5 non-delivery problems subsequently demonstrated — proved too low for projects to reach financial close. A larger budget gives headroom for strike prices that reflect actual project costs rather than auction-floor desperation.

For consumers, this is a long-term bet. Every CfD awarded locks in a 15-year price guarantee. The £1 billion annual budget ceiling could translate to anywhere from £5 billion to £15 billion in total consumer exposure over the contract terms, depending on how many contracts are awarded, at what strike prices, and what happens to wholesale electricity prices. If gas prices remain elevated, CfDs continue to function as consumers intended — generators pay back the difference. If wholesale prices fall (as they would in a system with high renewable penetration cannibalising its own market), consumers pay the spread for 15 years.

The structural question this budget does not address: CfDs are administrative price-setting. The strike price is not discovered by a market — it is set through a constrained auction where the government defines the pot structure, the administrative strike price ceiling, and the budget. The "competition" is between projects bidding against a cap, not between buyers and sellers establishing value. A £1 billion budget makes the administered mechanism larger. It does not make it more market-like.

The AR5 lesson hangs over this. AR5 awarded offshore wind contracts at strike prices around £37/MWh (2012 prices). Multiple projects subsequently failed to progress because the strike prices did not cover actual costs once supply chain inflation, interest rate rises, and grid connection costs were factored in. The larger AR6 budget implicitly acknowledges that squeezing developers on price produces non-delivery. Whether the budget is large enough to allow viable strike prices — particularly for offshore wind — depends on what administrative strike price ceilings DESNZ sets for each technology pot.

What happens next

The budget announcement is the first step in the AR6 process. The key decisions that follow:

- Pot structure and technology eligibility. DESNZ will confirm which technologies compete in which pots. The established/emerging split determines whether mature technologies (onshore wind, solar) compete against each other or against less developed ones (floating offshore wind, tidal).

- Administrative strike prices. The maximum price at which each technology can bid. These are the binding constraint — not the budget. If the ASP for offshore wind is set below viable project costs, no amount of budget headroom helps.

- Allocation round opening. AR6 was expected to open in 2024, with results announced later that year. The timeline depends on DESNZ publishing the final allocation framework and delivery body (LCCC) readiness.

- Non-delivery risk. The government will need to address what happens when AR6 contracts — like AR5 before them — fail to reach financial close. The CfD framework has no mechanism to recycle undelivered capacity back into subsequent rounds quickly. Budget committed to non-delivering projects is budget wasted.

The £1 billion figure is a political signal as much as an economic one: the government wants to be seen committing to renewables deployment at scale. The test is whether the detailed parameters — strike price ceilings, pot structures, delivery incentives — are set at levels where projects actually get built, rather than where press releases look impressive.