Energy UK Explains: Allocation Round 7

Why AR7 is critical for our future energy needs

The Contracts for Difference (CfD) scheme is the Government’s main tool to de-risk investment in renewable generation, with revenue-stabilising contracts awarded at yearly auctions. The Government’s plans to deliver a clean power system by 2030 heavily rely on the CfD scheme; in particular, the success of the forthcoming AR7 auction, due to open in August 2025.¹

The Clean Power Action Plan² requires an additional 28-35GW of offshore wind capacity in addition to what was in operation at the end of 2024, five to six times more capacity than completed in the previous five years, and a doubling and tripling of onshore wind and solar capacity respectively. This is a significant opportunity for economic growth that will also deliver energy security, price stability for consumers, and a reduction of greenhouse gas emissions.

Last year, the Government made positive strides to align the CfD scheme with the scale of its clean power ambition. AR6 was an historic success,³ securing record capacity and setting the CfD back on track after AR5 failed to secure any new offshore wind projects. However, the recent cancellation of the Ørsted Hornsea 4 project that was awarded a contract at AR6 and the subsequent loss of 2.4GW from the offshore wind pipeline, puts additional pressure on AR7 to deliver.

A specific capacity ambition for AR7 will be set ahead of the bidding window opening, but we know that between 15GW and 23GW of offshore wind will need to be procured across AR7 and AR8 to reach the Government’s targets. If the Government aims for the higher end of the CP30 range, more offshore wind capacity will need to be procured in AR7 and AR8 than all previous allocation rounds combined.

Figure 1: Offshore wind status at each auction round with further capacity needed to reach Clean Power 2030 targets

Is AR7 on track to deliver?

The Government has explored ways to ensure the CfD scheme can deliver this ambition, which are welcome.⁴ Even so, AR7 bidders approach this auction under unique circumstances, facing unprecedented levels of uncertainty against a backdrop of ongoing challenging macroeconomic conditions. With less than two months before the bidding window opens, key aspects of the auction’s design remain unknown.

Adverse macroeconomic conditions

Developers are citing concerns related to higher capital costs, commodity price increases, and rising supply chain costs driven by stronger competition. Additionally, geopolitical developments, including tariff concerns, are adding to uncertainty on pricing and adding risk premiums to supply chain contracts.

These impacts have been felt by major infrastructure projects globally and is not limited to energy or renewable infrastructure.
Ørsted noted that the continued increase of supply chain costs, higher interest rates, and risks to delivery of its Hornsea Four project were reasons for its decision to no longer go forward with the projects. This is in line with challenges to infrastructure investment in the UK more widely, with costs, policy risks, the planning system and skills key issues to infrastructure investment more broadly.

Offshore wind will provide the backbone of the UK’s future power system and is expected to generate 50% of GB’s electricity by 2030 under the Government’s objectives.⁵. At the same time, offshore wind projects are particularly exposed to global economic conditions and vulnerable to delivery risks, with construction taking around twice as long as other renewable projects.⁶ This underpins the importance of a stable, reliable, and predictable policy framework for CfD bidders.

Unprecedented policy uncertainty

With less than two months until the UK’s most significant CfD auction to date and following three years of debate, there is still no clarity on the outcome of the Review of Electricity Market Arrangements (REMA): whether and how a zonal pricing market will be implemented or whether national pricing will be retained and reformed. Either option will have a profound impact on projected future revenues.

Alongside wholesale market arrangements, REMA uncertainty is creating delays on decisions for a temporary cap and floor to generation Transmission Network Use of System (TNUoS) charges, with an expected open letter giving a more detailed view of the future of TNUoS charges (both under national and zonal pricing) and on Ofgem’s wider review of network charging.

Announcements on REMA and TNUoS are expected ahead of the auction, but there is little time for projects looking to bid into AR7 to factor the impacts of these decisions into bid development. The less time there is to effectively model impacts on projects and the less information provided, the more risk will be priced into bids, and the higher the cost will be for consumers. Cutting energy bills must remain a joint priority alongside the Government’s clean energy ambitions.

While it’s welcome that action is being taken to address grid connection delays, the timelines of NESO’s current reform process mean AR7 bidders will enter the auction without knowledge of whether their connection date will remain the same. Projects bidding into AR7 may end up with a later connection date than their CfD delivery date, which presents a substantial risk to the cost of projects and their delivery. Without clarity, these unknown factors will add an additional risk premium to bids.

What can be done to reduce the risk premium, and minimise costs to consumers?

Measures can be taken to mitigate some of the risks and uncertainty facing bidders ahead of this critical auction, to secure the capacity required by the Government’s plans and ensure it is delivered at best value for consumers.

Appropriate auction parameters

The Government should ensure that auction parameters reflect the macroeconomic conditions outlined above. Administrative Strike Prices (ASPs) should be set at an appropriate level that allows projects to submit viable bids, and would avoid negative impacts on auction liquidity or an outcome similar to AR5, in which no new offshore wind projects came forward.

As shown below, under typical market conditions the CfD scheme enabled significant and rapid reductions in the cost of offshore wind projects and was effective at securing capacity under a favourable macroeconomic context. AR5 demonstrated the impact where parameters are not reflective of market conditions; the resulting price rise in AR6 incorporates the challenges developers are currently facing and subsequently pricing into bids. This was demonstrated further by Hornsea 4.

If these conditions are not reflective of the market, developers could choose not to bid; bid in at a higher price to account for risk; or subsequently need to cancel projects they can no longer deliver. The competitive nature of the CfD means it remains the best tool to support the development of cost-effective renewables, where the level of risk is shared between the developer and Government, and not energy bill payers.

Figure 2: The average strike price and total offshore wind capacity procured at each round reflect the effectiveness of CfDs when parameters are set according to the economic context.

Figure 2 shows that the capacity achieved typically aligns with the strike price. Until AR4, positive outcomes were supported by favourable economic conditions.

Prior to AR5, key players in the sector warned the Government around the implications of not reflecting current market instability.⁷ Following the disappointing results, AR6 was adjusted, with an administrative strike price that was 66% higher for offshore wind, concluding in a successful round. While the average strike price was higher, this was necessary to reflect the challenges all major infrastructure projects are facing. To deliver the capacity needed to meet our future energy security as set out by Government targets, the parameters for AR7 will need to be set according to the current macroeconomic context.

Resolving uncertainty as soon as possible

Decisions on the future of wholesale pricing and on the TNUoS cap and floor must be made as soon as possible. If a decision is taken to implement zonal pricing, this must be accompanied by adequate legacy arrangements that would effectively mitigate additional risk faced by developers under zonal pricing. These developers have invested billions of pounds in the UK market. Capital has a choice of location, and businesses will not hesitate to locate elsewhere if market conditions are more favourable. If the package of measures cannot provide the necessary detail and assurance investors require, it will have a limited impact on reducing risk and the impact on AR7 bids.

The continuing uncertainty with major policy decisions; the short timeframe to prepare bids once these decisions are announced; and potentially insufficient information about market design are all things the Government will need to consider when setting the parameters and ASPs for AR7, placing consumers at the heart of their decision making. Additional risk and uncertainty necessarily adds costs to major projects, which is ultimately reflected in the price people and businesses pay for this essential service. NESO and DESNZ must both give certainty to project developers that the potential changing of their connection date as a result of ongoing connection queue reforms will not mean they become ineligible for the CfD revenues they are bidding for.

What else can be done to reduce the impact of uncertainty on bids?

Extending the CfD contract length

As noted in Energy UK’s paper ‘How to cut bills’,⁸ extending the length of CfD contracts would help reduce uncertainty for investors and reduce the strike prices compared to shorter contracts. Any reduction in the price of CfDs will feed through to consumer bills. Extending the length of CfD contracts is one of the most impactful levers at the Government’s disposal to reduce bid prices.

References

1 LCCC (2025), AR7 Timeline

2 DESNZ (2024), Clean Power 2030 Action Plan

3 Energy UK (2024), Energy UK explains AR6

4 Energy UK (2025), Response to DESNZ consultation on further reforms to the CfD scheme for AR7

5 DESNZ (2024), Clean Power 2030 Action Plan

6 Iberdrola, Construction of an offshore wind farm

7 Energy UK (2023), Energy UK respond to the Government’s announcement on budget for Allocation Round 5 of the Contracts for Difference Scheme

8 Energy UK (2025), How to cut bills