UK Contracts for Difference and the Capacity Market: review and evaluation

Background

Rather tucked away in Part 2 (Electricity Market Reform) of the UK’s Energy Act 2013 (2013 Act), in section 66 to be precise, there is a requirement for the Secretary of State to carry out a post-implementation review of the provisions of various chapters within that Part, including those dealing with Contracts for Difference (CfDs) and the Capacity Market (CM). Section 66 provides for this to be done as soon as reasonably practicable after 5 years from the passing of the 2013 Act, with a report then to be produced assessing (amongst other things) the extent to which the objectives behind the relevant provisions have been achieved. This is separate to the annual updates required under section 5(4) of the 2013 Act.

Part 2 of the 2013 Act is the central plank of the legislative framework designed for delivering secure, affordable and low carbon energy, and the progenitor of the CfD and CM schemes. The former scheme is intended to provide long-term revenue stabilisation for new low carbon electricity generation in Great Britain, thereby promoting investment, and the latter scheme aims to ensure security of electricity supply by paying for reliable sources of capacity. Both of these schemes are administered by National Grid Electricity System Operator (as the Electricity Market Reform delivery body), with the Low Carbon Contracts Company managing CfD contracts, and the Electricity Settlement Company handling CM payments.

Review and evaluation

The required 5 year review of the CfD and CM (and other) policy aspects of Part 2 of the 2013 Act was actually completed a good while ago, but the review report was not published by BEIS until 13 May this year, following delays associated with Brexit, the Covid-19 pandemic and other matters. The report is called the Five Year Review of the Energy Act 2013 and, notwithstanding it was completed in 2019, is helpful reading for anyone with an interest in low carbon electricity generation projects and the on-going energy transition to net zero. It includes (amongst others) informative chapters on CfDs and the CM, with the CM chapter containing a link to a separate CM five-year review document published in July 2019.

The focus of the review, as regards CfDs, is on allocation rounds (ARs) 1 and 2, since which AR 3 has been completed, with AR 4 (which launched in December 2021) ongoing, and AR5 expected to open next March. For the CM scheme, which complements government decarbonisation polices, the review considers the capacity auction rounds that have been conducted to secure capacity, as well as changes to the scheme, and the scheme’s future. The review concludes that the policy objectives for the CfD and CM schemes are, on the whole, being met, and recommends that the schemes be kept.

On the same day that the above review report was published, BEIS announced the outcome of a related three-phase evaluation of the CfD scheme, which took place between 2018 and 2021, the findings of the first phase of which were used to inform the 5 year review. Several documents have been published by BEIS in relation to the evaluation exercise, all available using the above link, including:

• Evaluation of the Contracts for Difference Scheme - Phase 1: Allocation Rounds 1 and 2 – phase 1 of the evaluation assessed the extent to which CfD ARs 1 and 2 met their intended objectives;
• Evaluation of the Contracts for Difference Scheme - Phase 2: Allocation Round 3 - phase 2 of the evaluation assessed the extent to which CfD AR 3 met its intended objectives; and
• Evaluation of the Contracts for Difference Scheme – Phase 3 – Final Report – the phase 3 report provides a synthesis of the findings from the previous stages of the evaluation, as well as new evidence on the implications of the Covid-19 pandemic for the delivery of contracted projects (including its impact on project finance).

The CfD evaluation exercise explored the following five questions:

• To what extent, how and why, is the CfD scheme contributing to its intended objectives, and do its outcomes, both intended and unintended, differ for different groups (project developers, investors, technology types)?
• Are the design parameters of the CfD scheme and auction allocations appropriate for achieving the intended objectives?
• Is the CfD scheme being delivered as intended?
• Does the CfD scheme present good value for money?
• What are the implications of the findings for the future contribution of renewable technology to the electricity market?

The findings can be found in the ‘conclusions’ section of each of the three evaluation documents, but the bottom line assessment is that the CfD scheme is meeting its core objectives. As to the future, the final report states that most developers had positive views on the role of the scheme in continuing to support increased investment in renewables development.

The outcome of the three-phase evaluation has been added to BEIS’s Contracts for Difference policy paper page, which provides the link to the updated BEIS ‘Policy paper – Contracts for Difference’, which in turn contains much information on the CfD scheme and all of the CfD allocation rounds.