Final parameters for Allocation Round 6 are scheduled to be published by 13th March 2024 with the round opening on 27th March 2024. Legally, final parameters must be published at least 10 working days before the round opens which means they could be published earlier.
What are the Final Parameters?
They are different to Core Parameters - Pot Structure, Delivery Years and Administrative Strike Prices – published in November last year. Final Parameters are key and designed to encourage competitive bidding. They include the following which may be used for AR6:
- a Monetary Budget limit for each Pot;
- a Capacity Cap limiting the capacity awarded to each Pot;
- a Minimum which is a technology specific ring-fenced budget to support newer more expensive technologies that would otherwise be unable to compete; and
- a Maximum used to support all technologies by ensuring one technology does not potentially dominate the auction (this can be a budget or capacity cap).
Published alongside the final parameters will be another important document – the Final Allocation Framework which sets out the rules for the auction. But it will be the annexes that readers will be more interested in, particularly the annexes with assumptions about Load Factors (technology efficiencies) and Reference Prices (future wholesale electricity prices) which are used to calculate budgets. Essentially, the lower the Reference Prices and higher the Load Factors assumed, the higher the budget or bill-payer impact which determines how much capacity can succeed at auction. These assumptions may sometimes be different to what the sector would use to account for the risk that consumers end up paying more if real-life projects generate more than forecasted.
What will happen for AR6?
Final Parameters for AR6 are still to be announced but based on information DESNZ has already published as methodology readers can make reasonable assumptions about what to expect. DESNZ is legally bound to take account of decarbonisation and deployment targets, value for money considerations for bill payers and subsidy control rules requiring a competitive auction when setting parameters. They will likely look at projects and capacity eligible to participate and estimate the budget impact if all or a proportion were successful at auction at a range of clearing prices. This process entails making various assumptions including project costs and revenues, future electricity prices and load factors. Various policy considerations are also likely to be factored in including trajectory towards decarbonisation targets.
The shift to 3 Pots for AR6 suggests looking back to what happened in Allocation Round 4 (AR4), which was also a 3 Pot round. There will also be considerable learning from the outcome of Allocation Round 5 (AR5).
Final parameters for AR6 are being set in an environment where there remains continued uncertainty about costs and future electricity prices. The already published AR6 Administrative Strike Prices (maximum cap on how much a technology can receive) and ASP Methodology tell us a great deal about DESNZ’s approach some of which may be similar when they set final parameters. The AR6 ASPs for several technologies are much higher than AR5 (e.g. 66% higher for offshore wind). Higher ASPs together with healthier pipelines of eligible projects should lead to significantly higher budgets. Speculating on final parameters for the different pots:
Pot 1 comprises established technologies including potentially several small solar projects, which brings uncertainty about the pipeline and likely bidding capacity. Despite the uncertainty, assumptions will have to be made about the pipeline as part of the budget setting process. The outcomes of previous auctions will also be considered. AR5 results showed some Strike Prices were close to or at their ASPs. AR4 included capacity caps for solar and onshore to ensure one technology did not dominate the auction. Will there be similar capacity caps for these technologies in AR6?
Pot 2 comprises less established technologies with higher ASPs (than AR5), uncertainty about likely bidders and wide-ranging costs. AR4 had ringfenced budgets (minimum) for floating offshore wind and tidal, whereas AR5 had a minimum for just tidal. Will there be a minimum again for tidal or is tidal now able to compete with other technologies on price? Will there be a minimum for floating since none was successful in AR5? To account for wide-ranging costs, will there be a maximum for the cheapest technologies?
Pot 3 is the largest comprising of just offshore wind. None came through in AR5 meaning there was no price discovery. The significantly increased ASP (up 66% from the AR5 ASP) and healthy potential pipeline will mean a significantly increased budget. Assumptions will have to be made about the pipeline and because projects are so large; over, or under-estimating how much will participate will impact the budget significantly. Policy ambition and political steer to see a better outcome for offshore wind will have to be balanced with concerns about the impact on bill-payers. Will there be a capacity cap to encourage competitive bidding? or will there be no capacity cap to support deployment and make up for lost capacity in AR5?
Although termed final parameters, DESNZ has the opportunity to increase (not decrease) budgets after National Grid ESO has notified them of their valuation of eligible applications (sometime between May and August depending on appeals made by applicants). DESNZ does this by issuing a Budget Revision Notice. It is only after this stage that eligible applicants will be invited to submit sealed bids.