Why is the UK’s current Contracts for Difference system failing to meet ambitious renewable energy targets and the urgent reforms needed to ensure a sustainable energy future?
As the climate crisis intensifies, the UK finds itself at a turning point in its renewable energy transition. Recent analyses, including a critical report from Cornwall Insight, reveal alarming projections: to meet our clean power targets by the decade’s end, public subsidies for developers of wind and solar farms must at least double from this year’s record levels. This stark reality highlights a fundamental flaw in the current Contracts for Difference (CfD) framework, which, if left unaddressed, risks derailing the UK’s ambitious energy goals.
The Inadequacy of Current Contracts for Difference
Contracts for Difference were designed as a mechanism to incentivise investment in renewable energy by ensuring developers receive a fixed price for the electricity they generate. They are overseen by a little known, wholly owned subsidiary of the UK Government, the Low Carbon Contracts Company which enables investment into low carbon technologies such as wind and solar and eventually Hydrogen and Carbon Capture, Usage and Storage.
This approach has facilitated significant growth in the renewable sector, contributing to the UK’s position as a global leader in wind energy. However, the changing dynamics of the energy market, supply chain challenges, coupled with escalating costs of development, have rendered the existing CfD structure increasingly inadequate.
One of the primary issues with the current CfD system is its inability to adapt to the rapidly evolving economic landscape. The soaring costs of materials, labour, and regulatory compliance have placed immense financial pressure on developers, making it challenging to deliver projects on time and within budget. Additionally, the growing competition for limited subsidy funds has created a bottleneck, where only the most robust projects proceed, sidelining innovative but riskier ventures that could contribute significantly to the renewable mix.
Government Inaction and the Need for Urgent Reform
The new Government has recognised the need for reform, as evidenced by its recent consultation on the CfD framework. A spokesperson for the Department for Energy Security and Net Zero stated, “Our clean power action plan will provide the foundation for the UK to build an energy system that can bring down bills for households and businesses for good.”
While this statement is promising, it also underscores the urgent action required to address the shortcomings of the current system. The stated intention to improve competition and shorten project development times is commendable, yet it must be coupled with a bold increase in funding and a more flexible approach to subsidy allocation.
The Government’s failure to act proactively in the face of these challenges is concerning. With the clock ticking towards the 2030 clean energy targets, it is critical that policymakers not only acknowledge the need for reform but also roll out a comprehensive strategy that ensures the necessary funding is available. The analysis by Cornwall Insight indicates that without a significant increase in subsidies, the Government risks falling short of its renewable energy ambitions, which would have dire consequences not just for climate targets but also for energy security and economic stability.
Analysis by independent policy institute, Curia which has run a series of “Get Britain Growing” conferences around the UK and runs the Clean Energy and Environment Research Group suggests that a lack of long term government commitment is holding back larger global private investment into the sector. While subsidies will help, Chief Executive of Curia, Ben Howlett highlights that the Government should “dangle the carrot” of subsidies to attract global investment to match their investment. He said, “our analysis shows that to increase the global attractiveness of the UK’s renewables sector, the Government should reform Low Carbon Contracts Company and model a replacement based on Denmark, which directly uses subsidies to leverage international investment.
“With limited public funds available, it does not require much upfront cost to bring in much more in global investment. Investment is de risked through subsidy and with one of the most stable governments in the G7, the UK could look like an attractive destination for inward investment in renewables.”
Denmark uses targeted subsidies and financial incentives to attract international companies, focusing on long-term stability for investors. They have strong partnerships between government and industry to ensure alignment on objectives. As a result, programmes like feed-in tariffs and tax incentives have created a favourable investment climate for renewables.
A Path Forward: Key Reforms Needed
Additional to leveraging private finance, Curia has suggested several steps for the Government to take to reform the CfD system effectively. First, the Government must commit to a substantial increase in the value of subsidies, aligning them with the financial realities faced by developers today. This could involve a tiered subsidy structure that rewards both established technologies and emerging innovations, fostering a diverse and resilient energy portfolio.
Second, the application and Auction bidding process for CfDs should be streamlined to facilitate quicker project deployment. By reducing bureaucratic hurdles and enhancing transparency, the Government can encourage a wider range of projects to compete for funding, ultimately driving down costs for consumers and increasing renewable output.
Finally, there should be a concerted effort to engage with stakeholders across the energy sector – developers, environmental groups, and local communities – to build consensus around the reforms needed. This collaborative approach will ensure that the new CfD framework is not only fit for purpose but also equitable and inclusive.
Final Thought
In conclusion, the current CfD framework is at a crossroads. Without decisive action to double public subsidies and reform the system, the UK risks jeopardising its clean energy goals. As the world faces the challenges of climate change, it is imperative that the UK’s energy policies evolve in tandem with market realities, ensuring a sustainable and prosperous energy future for all.
Curia’s Clean Energy and Environment Research Group has written to the Government as part of their consultation to set out their thoughts for reform of the CfD system. To find out more about the Research Group and take part in policy research and insight, contact team@curiauk.com.
