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The encyclopedia · Strategy & Leadership · Strategic decision · 2014–2019

Britain auctioned 15-year power contracts and offshore wind prices fell 67%.

CfD auctions let wind developers bid a 15-year strike price; competition drove offshore wind from £119.89 per MWh in 2015 to £39.65 in 2019.

UK Government · Dogger Bank Wind Farm

the move

Offshore wind needs billions of upfront capital, but its revenue depends on volatile wholesale power prices for decades, which made financing expensive and slow. The UK's Electricity Market Reform answered with the Contract for Difference: a 15-year contract that pays the generator the difference between the market price and an agreed strike price.

The clever part was that strike prices were not set by the government: they were won in competitive allocation rounds. Developers bid the price at which they would build, and the lowest bids won contracts, so the state never had to guess what offshore wind costs.

In the first allocation round, February 2015, offshore wind won contracts at £114.39 to £119.89 per MWh in 2012 prices. By the third round, September 2019, Dogger Bank projects won at £39.65 per MWh, about two-thirds lower, as scale, learning, and competition did the work.

why it works

  • A 15-year contract removes the revenue risk that blocks capital-intensive investment.
  • Competitive rounds force developers to bid their real costs down to the marginal project.
  • Round-by-round published results created a visible learning curve for the whole industry.
  • The government pays only the gap between market price and strike, sharing the downside of falling prices.
the payoffAuction long contracts; let competition set the priceclever

what transfers

If an industry needs long-term certainty to invest, do not set its price: auction fixed-duration revenue contracts and let the bidders reveal the cost.

what came after

CfD allocation rounds became the UK's main support mechanism for renewables, and offshore wind prices kept falling, making the UK the world's largest offshore wind market. The auction-then-contract design was copied by other governments and is now a standard tool in renewable energy policy worldwide.

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