CfD Stakeholder Bulletin — 24 November 2020

What changed

BEIS confirmed seven amendments to the CfD scheme ahead of Allocation Round 4, published 24 November 2020. The headline changes: a dedicated third pot for offshore wind, a separate administrative strike price for floating offshore wind, and — most consequentially — an extension of the negative pricing rule so that CfD generators receive no payments when day-ahead wholesale prices fall below zero. Coal-to-biomass conversions are excluded from future rounds entirely. A second consultation on implementation details (contract drafting, supply chain plan mechanics) runs until 18 January 2021.

What this means in practice

Negative pricing rule. This is the change that matters. Under the existing CfD contract, generators receive their top-up payment (strike price minus reference price) regardless of what the wholesale market does. The extension means that when the day-ahead price goes negative — which happens with increasing frequency as intermittent capacity grows — CfD generators get nothing. They bear the loss.

This is a direct transfer of market risk from consumers to generators. Previously, consumers paid the full strike price even when wholesale power was worthless or worse. Now generators face a choice: curtail output during negative price periods, or run at a loss. The incentive effect is correct — it forces generators to internalise the system cost of producing power nobody wants. But it also exposes a structural tension in the CfD design. The whole point of a CfD is to remove market risk from the generator to lower the cost of capital. Every unit of market risk you put back raises the risk premium in the bid. The question is whether the saving to consumers from not paying during negative price hours exceeds the increase in strike prices that generators will bid to compensate. For AR4, the answer was almost certainly yes — negative price hours were still rare enough that the expected cost was small relative to the signalling value.

`★ Insight ─────────────────────────────────────` The negative pricing rule is a half-measure toward proper market exposure. A CfD that pays nothing during negative prices but guarantees the strike price at all other times still insulates generators from the price signal 99%+ of the time. It addresses the most politically visible symptom (paying generators when power is worthless) without touching the underlying problem: CfD holders have no incentive to locate where the grid needs them, generate when demand is high, or respond to locational price signals. The rule treats the output of a broken incentive structure rather than fixing the structure itself. `─────────────────────────────────────────────────`

Third pot for offshore wind. AR4 would be the first round where offshore wind competed in its own pot rather than against other established technologies. This eliminated cross-subsidy concerns — onshore wind and solar no longer had to bid against a technology with fundamentally different cost structures and political support. It also gave government direct control over how much offshore wind capacity to procure, independent of other technologies.

Floating offshore wind. The administrative strike price creates a protected category. Floating offshore wind is pre-commercial, and forcing it to compete against fixed-bottom offshore wind (which had seen strike prices fall from £150/MWh in AR1 to £39.65/MWh in AR3) would have killed it. The administrative strike price is set by government rather than discovered through auction, which means it is an administered subsidy, not a market outcome. Whether this is justified depends on whether you believe floating offshore wind has a credible learning curve that auction competition would interrupt. The decision not to extend phasing to floating projects suggests government expected these to be small-scale demonstrations, not utility-scale deployments.

Coal-to-biomass exclusion. A clean-up measure. Coal-to-biomass conversions were already uneconomic relative to new-build renewables, and allowing them into future rounds would have been politically incoherent with the coal phase-out. No practical impact on AR4 outcomes.

Supply chain plans. The strengthening of supply chain plan requirements adds compliance cost without pricing the underlying constraint. If the goal is domestic manufacturing capacity, a local content requirement or a price preference in the auction would be more efficient than a qualitative assessment process that rewards consultancy spend over actual investment. The 44-document bureaucracy pattern applies here: each layer of guidance creates work for compliance teams without changing the economics of where manufacturers choose to build factories.

What happens next

The second consultation closes 18 January 2021, covering contract drafting for the negative pricing rule, floating offshore wind terms, and revised supply chain plan guidance. Draft contract terms (Agreement and Standard Terms and Conditions) are published alongside for comment. AR4 itself was expected to open in late 2021, with results announced in 2022. The negative pricing rule applies to all contracts issued from AR4 onwards — existing CfD holders are unaffected, which creates a two-tier market where legacy generators face different incentives from new entrants on the same grid.