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Clean Industry ‘Bonus’ or ‘Burden’?3 March 2025

Introduction

"The purpose of the CIB is to incentivise investment in the UK offshore wind supply chain and increase sustainability within the industry."

On 13 February 2025, the application window opened for Allocation Round 7 (“AR7”) of the UK government’s Contracts for Difference (“CfD”) scheme. AR7 introduces the Clean Industry Bonus (“CIB”), superseding the previous ‘Sustainable Industry Rewards’. In short, the CIB is an additional pot of funding available for proposed fixed and floating offshore wind projects. Broadly, the purpose of the CIB is to incentivise investment in the UK offshore wind supply chain and increase sustainability within the industry. The CIB budget for AR7 is set at £27m per GW, with total potential funding reaching up to £200m for offshore wind projects totalling between 7-8 GW. Applications must be submitted by 14 April 2025.

In this article, we examine what this new scheme means in practice for generators during the CfD application process, the impact on the CfD once awarded, implications for developers and lenders and the broader industry response.

Impact on AR7 application process

Participation in the CIB is not optional. Generators must submit a ‘CIB Statement’ in order to qualify for AR7. In practice, this means generators must meet the following “minimum standards”:

  • minimum investment in the supply chain of £100m/GW for fixed-bottom offshore wind or £50m/GW for floating across at least one of the following:
    • investment in shorter-supply chains – capital investment in manufacturing facilities, ports or installation firms in government-designated deprived areas of the UK; or
    • investment in more sustainable means of production – commitments to procure from suppliers with Science-Based Targets (“SBTs”) for emissions reductions.

Provided these minimum standards are met, generators’ “CIB extra proposals” will be considered (extra proposals being any proposals exceeding the minimum standards). These proposals are assigned a score by The Department for Energy Security and Net Zero (“DESNZ”) based on factors including the level of proposed investment beyond the minimum standard and the proportion of suppliers with SBTs above the minimum standard. Each CIB extra proposal is then ranked to determine the allocation of funding from the available CIB budget, with any unallocated funds available for distribution through a secondary allocation round.

Impact on the CfD itself and the financials

"Participation in the CIB is not optional."

The investments that generators commit to within their CIB Statement, including any extra proposals, must be made by the expected CfD start date. Progress against achievement of generators’ commitments is assessed by way of an ongoing monitoring process under the CfD, including meetings with DESNZ at least bi-annually. Generators are required to submit progress reports and a final compliance report to obtain a ‘CIB Implementation Statement’ from the Secretary of State to certify that their CIB commitments have been met. A minimum standard or extra proposal commitment will be deemed to have been met if the full investment committed to in the CIB Statement has been made by the expected CfD Start Date. Minimum standard commitments must be met in full, however extra proposal commitments may be partially satisfied.

AR7 introduces “performance-related adjustments” to penalise generators who fail to deliver their CIB commitments in whole or in part. If a generator is unsuccessful in delivering on the minimum standards, it will not receive any CIB payments and performance-related adjustments will be applied to its CfD payments, until the full adjustment has been applied (the adjustment being equal to the difference between the total minimum standard required and the generator’s actual spend against that standard). Generators that meet the minimum standards but fail to deliver their extra proposals will neither receive a partial CIB payment nor face a performance-related adjustment to their CfD payments. Generators that meet the minimum standards but only partially meet their extra proposal commitments, will not have their CfD payments reduced but will only receive a partial CIB payment, proportionate to the total investment that the generator has actually delivered against their initial proposed investment.

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"The investments that generators commit to….must be made by the expected CfD start date."

A generator may only avoid the above penalties if they convince the Secretary of State that non-compliance is due to events outside of its control (such as supplier failure or a co-investor walking away) and alternative means of meeting the minimum standards could not be found. All CIB payments and performance related adjustments are applied through the CfD payment mechanism alongside the other CfD revenue, over billing periods spanning a maximum of four years from the point CfD payments commence.

Wider impact on generators and lenders

The success of the CfD as a form of subsidy to date is in large part down to the fact that a CfD delivers a predictable base-line revenue stream, facilitating long-term project financing with minimal exposure to wholesale energy price volatility. The introduction of performance-related adjustments under AR7 brings with it a degree of uncertainty around the predictability of the CfD revenue stream. Whilst it is ultimately within the generator’s gift to mitigate this risk through adjusting investment levels as appropriate, lenders will not have any direct control over this and any potential reductions in revenue over the CfD contract term will likely be seen to threaten the stability of debt service repayments.

To mitigate this, lenders may consider imposing stricter covenants within their loan agreements, such as increasing reporting requirements in relation to borrowers’ supply chain investments and requiring contingency capital reserves to provide comfort against potential CfD payment reductions. Similarly, lenders may consider adjusting their debt service coverage ratios and loan life coverage ratios to account for reductions in CfD payments, ultimately leading to more conservative lending terms.

"The introduction of performance-related adjustments under AR7 brings with it a degree of uncertainty around the predictability of the CfD revenue stream."

From the perspective of developers in the industry, various major offshore wind players have for some time been lobbying government to support UK-based manufacturing to drive cost-efficiencies and allow the UK to service a growing global offshore wind market. That said, developers will be concerned that the CIB effectively requires them to absorb further increases in project DEVEX, at a time when rising inflation, supply chain disruption and high interest rates have pushed costs to an-all time high within the offshore wind industry. It is also worth noting that even if developers are successful in receiving additional CIB revenue to supplement their underlying CfD payments, the additional revenue is only disbursed after the project has started generating power. Developers may consequently find themselves having to contribute additional equity or borrow at higher rates to realise this increased expenditure.

It is also worth considering whether the UK is sufficiently well-equipped to realise this investment, with reports indicating a substantial skill shortage against the estimated 104,000 people forecast to be employed in the offshore wind industry in the UK in 2030¹. Although we suspect there will be those that argue that the skills shortage is due to a lack of investment, which is precisely what the CIB is intended to address.

Industry reaction

The government has advertised the launch of the CIB as pivotal for delivering growth, improving deprived communities, and further strengthening the UK’s energy security. Trade unions have broadly welcomed the scheme, citing the potential for high-skilled job creation in former industrial hotspots. The reaction from developers has been decidedly more muted, with key players perhaps cautiously assessing the market landscape before making any public announcements.

"Developers will be concerned that the CIB effectively requires them to absorb further increases in project DEVEX."

It is perhaps notable that respondents to the government’s consultation expressed a desire for additional clarity on how CIB payments would be made, as well as transparency on the implementation and timing of performance related adjustments. The results of AR7, expected to be announced over the summer, will provide the first indication of how the market has responded to the CIB and whether its introduction can be deemed a success.

Reference documents and related WFW publications

The CIB allocation framework and guidance document can be found here.

For further information about the Contracts for Difference scheme and a review of Auction Round 6, please see John Rosmini and Cole Tennant-Frys’ article available here.

Other related WFW publications include:

London Trainee Matthew Ward also contributed to this article.

[1] Offshore Wind Skills Intelligence Report 2023 – https://www.owic.org.uk/media/gf5ddwxt/offshore-wind-skills-intelligence-report-2023.pdf

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