Offshore wind auctions no longer offer ‘financially sustainable prices’
The government’s flagship offshore wind scheme is no longer fit for purpose, and the UK needs to establish a long-term funding plan for renewable auctions, as inflation and supply chain pressures start to bite, trade bodies have warned.
Industry group Energy UK has welcomed the government’s decision to increase the budget for the current allocation round of wind projects from £205m to £227m – but warned it still remains £40m below last year’s auction.
Deputy director Adam Berman argued that the ‘contracts for difference’ scheme, where wind producers accept a a capped floor and ceiling for earnings in exchange for funding guarantees, was no longer viable – especially with auctions still determined by companies offering the lowest generation costs for energy, known as ‘strike prices.’
“While the budget increase is a positive development, it falls short of addressing the more fundamental problem – that the CfD regime no longer offers financially sustainable prices,” he said.
There have been growing concerns within the sector that the fifth allocation round for offshore wind projects in British waters could be the first time generation prices have risen since the scheme was first adopted, with producers unable to offer lower rates due to higher production costs since the pandemic amid a global economic downturn.
Cannot rest ‘on our laurels’
Berman warned that supply chain prices for renewables have risen between 20-40 per cent, which contributed to Vattenfall’s suspension of support for the Boreas offshore wind farm off the coast of Norfolk, which would have provided clean energy to 1.5m households.
He argued this “shows the danger of resting on our laurels,” in the face of competition from rival markets such as Europe and North America – which have outlined vast subsidy regimes for green projects such as the EU Green Industrial Plan and the US Inflation Reduction Act.
“The energy crisis has highlighted our reliance on volatile and expensive international gas markets. Renewables that provide clean, cheap, homegrown energy provide a route out of that crisis. However without putting the CfD regime on a financially sustainable footing, we risk consumers footing the bill as the UK falls behind other key markets,” Berman said.
While Renewable UK, an industry body which represents the wind and tidal industries, welcomed the government’s decision to boost the budget for the current auction for offshore wind projects, it also feared the country risked falling behind rivals without a more stable approach to funding allocation rounds.
Ana Musat, executive director of policy, argued it was essential to have “a consistent pipeline of projects” to fund the country’s transition to green energy .
“The most important step government could take to encourage investment in this growing sector would be to ensure that we have sustainable pricing in future auctions, which take into account the difficult economic circumstances faced by the sector. Setting artificially low prices will deter investment, reduce our pipeline and limit the UK’s ability to stay ahead in the global race for renewable energy capital, skills and supply chain investment,” she said.
Government targets massive wind power boost
Downing Street is targeting 50GW of offshore wind generation by the end of the decade, with a more than three-fold hike on current capacity (15GW).
Renewable UK’s latest ‘Energy Pulse’ report showed that the UK has the world’s second largest development pipeline of 97.9GW, only behind China with 157GW – but other nations are now hot on the UK’s heels with the US in third place with 82GW, Sweden in fourth with 75GW and Brazil fifth with 63GW.
The government is currently consulting on potential changes to the contracts for difference system, including factoring in wider societal benefits alongside generation costs in future auctions.
When approached for comment, a department for energy security and net zero spokesperson said: “Our flagship renewables scheme accounts for price fluctuations by protecting generators from inflation. We have also increased the budget to better reflect the amount of eligible projects that have applied for this round.”
“We regularly review its parameters and the outcome of the current round will help shape our thinking for future auctions.”
The government has attracted around £120bn investment in renewables since 2010, and is expected to attract a further £100 billion in net zero by 2030.
Results for the current allocation round are expected by 8 September.