What happened in the UK’s clean power auction, and how does it work?

Britain’s ambitions to be a leader in offshore wind energy were given a boost on Tuesday, as a key auction delivered nine new wind farms off the coast.

It compares with no new offshore wind schemes last year, and includes Europe’s largest and second largest planned projects.

The annual auction, in which contracts are given to renewable energy developers to build projects, secured a record number of new schemes.

But how does it actually work, and what does it mean for the green energy transition?

What is a contract for difference?

For a long time, builders of renewable energy projects needed Government subsidies to make it worthwhile, because coal and gas power plants were much cheaper.

But in the middle of the 2010s the Government changed the way it supported renewable energy projects.

Now, instead of subsidies, the companies sign a contract which guarantees them a fixed price for every unit of electricity they produce. These are called contracts for difference (CfD).

They give companies certainty that even if market electricity prices plummet, they will be protected.

But they also protect households should prices rise. Recently, as gas prices have soared, wind farms have returned hundreds of millions of pounds to customers, helping to lower bills.

Companies bid for these contracts to build new projects in an annual auction, by saying they can provide electricity at a price per megawatt hour (MWh). The cheapest bid wins.

Why does this year’s auction matter so much?

Because last time around the auction failed to deliver any offshore wind projects.

Each year, the Government sets a maximum price companies are allowed to charge if they bid for a CfD contract. Last year, for offshore wind, that was £44 per megawatt hour.

But companies had seen a sharp rise in the cost of doing business. They said that at £44 per MWh the wind farms would not be worth building, and so nobody bid at all.

No contracts were awarded, and no new wind farms were secured.

It was criticised across the industry, and put a dent in ministers’ promises to deliver 50 gigawatts (GW) of offshore wind by 2030.

As a result, all eyes were on this year’s auction to see what happened.

Did this year’s auction succeed?

Some in the industry think it was a big success, but opinions are still mixed.

The nine new offshore wind projects include what will be Europe’s largest and second largest wind farm projects – Hornsea 3 and Hornsea 4 off the Yorkshire coast.

Keith Anderson, chief executive of ScottishPower, which won contracts for two other offshore wind farms, said the industry is “back on track after last year’s misstep”.

In total, the new offshore wind projects will create about 5GW of power. That is five more than last year, but still fewer than the 7GW-worth secured in 2022’s auction.

It is also roughly half of what is required annually to meet the 50GW target by 2030.

Dan McGrail, chief executive of trade body RenewableUK, said the new offshore wind projects “will increase investor confidence”, but that future auctions will “need a big step-up from today” to meet 2030 targets.

And Ami McCarthy, Greenpeace UK’s political campaigner, said it “urgently needs to be followed up with a much bigger auction next year”.

Emma Pinchbeck, chief executive of Energy UK, added that Tuesday’s figures showed the CfD programme is “once again fit for purpose”.

What about other types of renewable energy?

Across on and offshore wind, solar and floating offshore wind and tidal energy, the auction delivered a new record of 131 projects.

They will be able to generate 9.6GW of energy, ministers said, which could power about 11 million UK homes.

Within that, contracts were awarded to about 90 new solar farms with a total capacity of 3.3GW.

Meanwhile, 20 new onshore wind farms were secured, with a capacity of nearly 1GW.

Six new tidal power projects were also secured, as well as the largest floating offshore wind project in the world to reach the market, Green Volt, which is double the size of Europe’s total installed floating offshore wind capacity.

Jess Ralston, head of energy at the Energy and Climate Intelligence Unit (ECIU), said the result will “mean cheaper power, jobs and growth as well as helping us transition off gas, which will increasingly come from abroad as North Sea output continues its inevitable decline”.