Administrative Strike Prices, AR7, and Corporate Power Purchase Agreements

It is important to stress that ASPs are not forecasts of future wholesale prices. Instead, they represent the government’s view of the highest “reasonable” cost for each technology, serving as both a policy backstop and a market signal. If the Department for Energy Security and Net Zero (DESNZ) sets the ASPs without factoring in industry cost increases, projects may withdraw (as seen in AR5 results, when offshore wind failed to attract bids). If it sets ASPs too high, it risks inflating costs to consumers in the event there is sufficient competition in the auctions.

ASPs do not represent final clearing prices. For example in AR6, solar cleared at ~£70/MWh, 21% below the initial ASP of £85/MWh. This illustrates the role of ASPs as ceilings for technology strike prices within each AR.

AR7 introduces several methodological changes compared to AR6, which directly impact ASP levels:

• Financing assumptions – DESNZ updated hurdle rates (the estimated minimum internal rate of return for investors in generation projects) using the latest investment research. In AR7, it also removed additional technology-specific risk premia (e.g. for offshore wind) included in AR6.
• Technology cost assumptions – DESNZ updated these figures with new research, which assumed Solar PV and onshore wind would see reductions in assumed capital and operating costs.
• Contract length – government extended CfD contractual terms for fixed-bottom offshore wind, floating wind, onshore wind and solar from 15 to 20 years, improving project bankability by reducing the time the asset would operate on a merchant basis after the CfD expires (the “merchant tail”) and thereby reducing the required ASP.
• Load factors – government took the opportunity to update modelling assumptions. It revised offshore wind net load factors down (increasing ASPs) and increased solar load factors (reducing ASPs).
• Network charges (transmission and wider charges) – government extended the forecast horizon from 5 to 10 years, with higher costs feeding into ASPs, particularly for offshore wind.

AR6 used 2012 real prices, while AR7 uses 2024 prices. For comparison, AR6 ASPs must be inflated by approximately 39% to align with AR7’s baseline:

Comparing the ASPs for each technology type, solar PV remains one of the most competitive technologies. DESNZ reduced its ASP 12% from AR6 to £75/MWh in AR7, reflecting cost declines in panels and efficiency gains. In contrast, government has increased offshore wind ASPs 11% to £113/MWh. This reflects a recognition of higher real-world costs: increased network charges, revised load factors, and updated financing assumptions. Offshore wind projects remain central to government’s Clean Power 2030 mission, but at a higher baseline cost than in AR6.

Hydro shows the largest ASP increase (+18%), primarily reflecting updated cost assumptions, including higher capital and labour costs and the impact of financing conditions, suggesting an increased willingness by government to support the technology in auctions.

CfD ARs and Corporate Power Purchase Agreements

ASPs and the cleared strike prices in CfD ARs present important benchmarks for developers and corporate consumers looking to agree Corporate Power Purchase Agreements (CPPAs). While CPPA activity tends to be disrupted while a CfD AR is active, as many asset developers look to actively participate in the auction, the metrics provide guidelines for negotiations. The ASP represents a reasonable ceiling price for a technology, while the agreed strike price is driven by supply and demand dynamics, technology pots, and wider costs that applicants are incentivised to minimise.

Corporates should remember that 15–20-year government-backed private law contracts under the CfD generally carry less risk in several areas – lower contractual risk and counterparty risk are just two examples. This means that assets offered into the AR may be able to bid at a lower price than could be agreed in a CPPA. The structure of the auction means that assets with lowest costs and with the least risk are most likely to be awarded contracts. However, CfDs also carry an increasing price risk, as intermittent renewable assets are not paid support when the day-ahead market price goes negative. Therefore, because CPPAs typically have negative price protection clauses, they offer attractive opportunities to developers and investors looking to mitigate this risk. This negative price protection also provides a valuable edge for CPPAs to compete with the CfD.

While offshore wind and other technologies follow differing auction timetables in AR7, we expect the notification of results to be between the end of November (shortest timetable for non-offshore wind technologies) and March (longest timetable of offshore wind). At that point we will know the cleared strike prices for each technology type. And from then, unsuccessful developers are likely to increase their activity looking for alternative routes to market for their assets, such as CPPAs.

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