What are Contracts for Difference and why is the Clean Industry Bonus important for wind generation?

The UK’s renewable energy sector is changing. News about updates to policy and legislation is dominating the headlines on a regular basis. Consequently, the sector is not short of jargon. This sometimes makes it challenging for even the cleverest of energy experts to wrap their heads around it.

Contracts for Differences (CfD) and the Clean Industry Bonus (CIB) are commonplace in energy sector news. But what do they actually mean? Who are they relevant to? And why are they important?

As we transition away from fossil fuels to renewable energy sources, there are numerous challenges to overcome. Arguably the most important of these is the challenge of helping a society so heavily dependent on oil and gas to decarbonise whilst causing as little disruption as possible. A successfully functioning grid needs just the right amount of solar and wind energy. Like the Goldilocks effect – not too much and not too little. The reality is that there will be times of the year where the wind does not blow, and the sun does not shine and times when there is too much wind and sunlight. In the former scenario, the challenge is that the grid won’t have enough energy to meet demand. And in the instance of the latter, renewable generators can actually be paid to take their energy supply off the grid (otherwise known as ‘curtailment’ - but that discussion is for another day).

To an investor, this does not provide the certainty they need for financial return, deterring them from handing out their bucks to renewable energy projects. To achieve a more predictable return on investment, CfDs step in. As a UK Government scheme set up to incentivise investment in renewable energy projects in the UK to encourage carbon reduction and social value, they provide renewable energy generators with financial protection from the constant fluctuation of wholesale energy prices

The CfD is, put simply, an auctioning system run by the Department for Energy Security and Net Zero (DESNZ). Energy companies are expected to submit a plan of investment and proposed delivery and request the subsidies needed to successfully build the renewable energy infrastructure.

Since the Contracts for Difference scheme was established in 2014, it has evolved to integrate the CIB (Clean Industry Bonus), formerly known as Sustainable Industry Rewards. The CIB is nominally worth £27m per GW of power production.

Fixed and floating offshore wind energy project applicants can participate the latest Auction Round 7 (AR7) and could obtain extra CfD revenue support if they chose to invest in more sustainable supply chains. Including for CIB in CfD applications for AR7 is not optional, meaning that applicants need to move quickly to ensure they can demonstrate that they meet the minimum financial investment in supply chain, as well as being able to demonstrate that their supply chain aligns to the Science Based Targets for carbon reduction. The CIB mechanism also provides for ‘CIB extra proposals’ meaning that additional cash is available for social value and carbon reduction proposals beyond the minimum standards.

Whilst the technical mechanics of measuring social value and carbon reduction can seem complex, Cundall is here to help you navigate this rapidly changing commercial environmental with technically robust solutions provided by more than 200 sustainability professionals. This is important where CIB extra proposals are being considered, as the practical feasibility of such proposals needs to be carefully assessed and quantified prior to being submitted.