On 21 March 2025, the Department for Energy Security and Net Zero’s (DESNZ) consultation on proposals to reform the contracts for difference (CfD) scheme ahead of the next allocation round (AR7) closed. Building on its Clean Power 2030 Action Plan, the UK government intends to reform the CfD to ensure that it has the best chance of meeting its ambition for a minimum of 43GW of offshore wind generation by 2030. With AR7 due to open in Summer 2025, DESNZ published its response to some elements of the proposed reform on 6 May 2025 (the ‘Initial Response’), with policy decisions on the remaining proposals to follow.
The background to the CfD
The CfD scheme was introduced as part of the UK’s electricity market reform, alongside the capacity market, to incentivise low-carbon electricity generation through the setting of a strike price, ie, a guaranteed price for electricity over the term of the CfD contract. The strike price is set during a CfD auction and varies between projects. The first CfD allocation round took place between October 2014 and March 2015, with subsequent rounds held every other year until March 2023, when the government announced annual CfD allocation rounds.
Any generator who successfully obtains an offer at auction will enter into a CfD contract with the Low Carbon Contracts Company, the contract being made up of a project-specific agreement (‘CfD Agreement’) and general terms.
The DESNZ’S Initial Response
The consultation sought views on several proposed changes, some of which have been addressed in the Initial Response, as outlined below.
Capacity ambition and later publication of contract budget notice
The consultation proposed removing the requirement to publish a budget notice at the outset of an allocation round for all technologies, instead publishing it after the allocation round has run. The Secretary of State would instead publish a capacity ambition for the allocation round, and then publish the final budget notice after reviewing anonymous pricing information from the sealed bids (see below). The Initial Response confirms that both proposals will be taken forward, with further clarity on how the capacity ambition will work and the timing of the publication of the contract budget notice to be provided in due course.
Allowing the Secretary of State to see anonymised auction information
The DESNZ proposed allowing the Secretary of State to request price-related information, such as bid price and capacity, from the CfD delivery body (NESO). The anonymised information would be shared with the Secretary of State to inform the final budget decision. This proposal was accepted by the majority of respondents to the consultation, and will be taken forward through amendments to legislation. The detail as to how this will work in practice is expected to be confirmed in the government’s final response and contract allocation framework.
Flexible bids and expedited process for fixed-bottom offshore wind
The consultation proposed accelerating the allocation process for fixed-bottom offshore wind projects if no Tier 1 appeals (ie, appeals by an applicant who failed to qualify for the round) were received. This proposal has hit a hurdle as the government does not consider there to be sufficient time to legislate for the change ahead of AR7. The DESNZ, however, is exploring possible non-legislative routes to enable this proposal to be taken forward for AR7.
The DESNZ also proposed that flexible bids should not be available for fixed-bottom offshore wind applications. The responses to the proposal were mixed; however, the DESNZ has confirmed its intention to not allow flexible bids for these applications because, with the budget being set later in the process, the DESNZ does not consider that such flexible bids would serve a purpose.
Outstanding consultation proposals
In addition to those elements covered in the Initial Response, the consultation proposed the following reforms.
Removing planning consent requirement for fixed-bottom offshore wind projects
The consultation proposed relaxing the eligibility criteria for offshore wind projects wanting to take part in AR7, by removing the requirement for fixed-bottom offshore wind projects to obtain planning consent before applying for a CfD. The consultation recognised the impact of potential long lead-in times for these projects to contribute to the Clean Power 2030 ambition.
The DESNZ proposed that, by a ‘consent eligibility date’, a project must still have evidence that its application for a development consent order has been accepted for examination (in England and Wales), or a Section 36 consent and marine licence has been applied for and public consultation commenced (in Scotland). The government’s preference would be for the consent eligibility date to be the CfD application deadline, although an alternative date of 13 December 2024 (the date the proposal was originally suggested in the Clean Power 2030 Action Plan) may be deemed necessary for AR7 to ensure projects would have sufficient time to come online to meet the 2030 targets.
The option for fixed-bottom offshore wind developers to apply for a CfD without planning consent in place has a knock-on impact on project timings that would usually be set as milestones in the CfD Agreement. The CfD Agreement would need to be amended to reflect this, building in greater flexibility in relation to meeting milestones, and the non-delivery disincentive may need to be disapplied for these projects.
Extending the CfD Agreement term beyond 15 years
Historically, CfD Agreements have had a term of 15 years; however, with advanced technology extending the operational life of plants, and energy price volatility, the government has sought feedback on whether a longer term would be more appropriate in regard to the modern day CfD process. No specific term length has been suggested, and the government will review the evidence collected to determine whether longer contract terms could be offered for AR7.
Other options considered include applicability to certain technologies only, and the possibility of bidders submitting multiple bids with different contract terms. These other options will not be taken forward for AR7, but may be considered for future allocation rounds.
Extending the solar PV target commissioning window (TCW)
The success of the solar industry has resulted in a pipeline of larger solar developments; however, the current three-month TCW is a potential barrier to the deployment of these larger projects. Given the increasing size of some projects and the associated delivery risks, the three-month TCW is deemed to be of insufficient length, and risks projects failing to commission on time, therefore entering contract erosion. Although some industry evidence suggests an increase to 12 months would be appropriate, the consultation proposes increasing the TCW from three to six months, in an attempt to balance the needs of removing this potential issue and delivering the 2030 Clean Power mission.
Temporary restriction on surrendered capacity entering AR7
Currently, developers with surrendered contracted capacity can enter such capacity into future allocation rounds. The government is currently assessing the value in allowing such surrendered capacity to be included in future allocation rounds, and has proposed to exclude capacity released through permitted reduction and final installed capacity flexibilities from AR7, with a view to gathering evidence to consult on and put in place an enduring regime for allocation round 8.
Implementing existing legislation
The government has legislated for two further developments to the CfD regime for AR7: removing potential barriers for onshore wind repowering applications (The Contracts for Difference (Miscellaneous Amendments) Regulations 2025 amended the Contracts for Difference (Definition of Eligible Generator) Regulations 2014 and the Contracts for Difference (Allocation) Regulations 2014) and allowing phased CfDs for floating offshore wind (FLOW) projects. The consultation sets out how these changes will be reflected in the CfD Agreement to ensure the AR7 policies are correctly implemented.
For repowering applications, eligibility requirements and evidence of decommissioning will be required to be met, which will include careful navigation between the project being decommissioned and the repowered project for which a CfD is being applied.
The contract amendments for enabling phased FLOW projects to apply for CfDs will include a requirement that they must commission a minimum of 95% of their contracted capacity, the required installed capacity, which reflects the current policy for FLOW projects that are constructed in a single phase.
Future’s a breeze for offshore wind?
Evidently, the DESNZ continues to explore the accelerated deployment of offshore wind projects, no doubt a welcome development for offshore wind developers who had previously shied away from the CfD regime (with no CfD capacity being awarded to an offshore wind project in allocation round 5). Combined with the introduction of the clean industry bonus (revenue support for offshore wind developers with more sustainable supply chains), the future is looking more positive for the offshore wind industry.
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