Offshore wind power generation has been doing very well in the UK, with around 14 Gigawatts (GW) of capacity now installed, and progress should continue, with Hornsea 4 getting the go ahead and Crown estate releasing 6 more offshore sites for development. There is the issue of how much of the profits from these projects King Charles should retain, but maybe more importantly, there are signs that the profitability of new projects may be falling due inflation.
Vattenfall had won a contract for its Boreas project off Norfolk last year at a record low price of £37.35/MWh. But with gas and supply chain costs rising, the market has now changed, making it economically unviable at that price. The Swedish state-owned company said costs had climbed by 40% due to a rise in global gas prices which have fed through to the cost manufacturing, putting ‘significant pressure on all new offshore wind projects’. Jess Ralston, the head of energy at the thinktank the Energy and Climate Intelligence Unit, said the government had set the starting price for the next contract auction before the global rise in market prices, meaning it was now too low.
RenewableUK, Energy UK and Scottish Renewables have written a joint letter to the Government calling for ‘urgent changes’ to Contracts for Difference. They say ‘the race to the bottom on strike prices incentivised by the current auction process is at odds with the reality of project costs and investment needs, jeopardising deployment targets. CfD strike prices are no longer cost reflective and, consequently, the industry’s capacity to invest in critical infrastructure and domestic supply chain is being eroded.’
You might say, maybe a bit harshly, that although the CfD system is meant to reduce them, there are always risks in any investment, so developers should not really be complaining to government. Be that as it may, similar problems have also spread to the USA, where markets are organised differently. There, Spain’s Iberdrola SA has cancelled a contract to sell power from a planned wind farm off the coast of Massachusetts. And Danish developer Orsted A/S has lost a bid to provide offshore wind power to Rhode Island, whose main utility said rising costs made the proposal too expensive. And it could get worse. According to BloombergNEF, at least 9.7 gigawatts of US projects are at risk because their developers want to renegotiate or exit contracts to sell power at prices that they say are now too low to make the investments worth it.
The economics can get quite complex and tricky, with, under some costing schemes, negative prices emerging, as in some EU countries. That so called ‘price cannibalism’ may be fine for a while for consumers, but it can undermine longer-term system development, and in the end, in a competitive ‘race to the bottom’, the companies go bust. For example, in Germany there have been some spectacularly low-cost contracts for some offshore wind projects, but it has been claimed that the full cost will be higher, so that this perhaps won’t end well for anyone.
Offshore wind may thus be having some issues, with some critics being increasingly pessimistic. Onshore wind was of course the initial front runner around the world, with offshore being seen as much more expensive, and initially mostly limited to the UK, where there were some areas with suitably shallow waters. But UK offshore wind boomed in that location and then moved further out, partly since the expansion of onshore projects in the UK has been stuck at around 15GW for some while, due to the governments block on siting and CfD access, apart from in Scotland, where some projects have gone ahead.
With the focus in the UK since the mid-2010s therefore mostly on offshore machines, as markets built and the technology improved, their power got around 40% cheaper. That’s in part because the units became much bigger than onshore devices and because wind speeds out to sea are typically higher and more reliable than onshore. So offshore siting clearly has benefits- since power output is proportional to the square of blade size and the cube of wind speed. Offshore turbines also have much less visual impact, and non from the shore if they are over the horizon. However, having to survive in sometimes very rough environments, they are still quite expensive bits of kit to build, and installing and servicing them at sea and linking their power back to shore, adds costs. And those cost have grown.
Nevertheless, with new technology like floating systems emerging, installation and maintenance costs may be reduced, and, with higher load factors available further out to sea, deep offshore units might win out in total system/social costs over onshore systems, depending on how you do the sums. Though the final analysis and balance is debatable, since, over the years, around the world, onshore wind has reduced dramatically in price- by 70% or more over the last few decades, depending on location. For example in the USA, where onshore has expanded very significantly more (382GW) than offshore (just 41MW so far), the former is usually seen as clearly the cheapest. There’s a bit more of a balance in scales in China (336GW onshore, compared with 31GW offshore), but the world total (at the end of 2020) was only around 63 GW offshore, compared with about 840 TW onshore. So onshore dominates.
What next? It remains to be seen, but, in the UK, if and when (after the election next year?) onshore projects get going fully again, they may win out again over offshore, depending on location. Though it's not really a competition - given the climate challenge, both are needed. In both cases, there will also be a need for some backup, short and long duration storage, and grid enhancement to reduce curtailment losses. It will take effort and a skilled workforce to do all this, but the way ahead for both on and offshore wind, and also for associated systems, looks very positive, with significant employment opportunities- Statista says there could be around 200,000 jobs just in offshore wind in the UK by 2030.
Offshore wind is currently backed by 83% of the UK public in the latest government poll. And despite its current funding problems, given a serious tweak to the CfD and energy pricing, it seems likely to continue to grow, not least because of its huge potential: one of National Grid ESO’s Future Energy Scenarios has 130GW projected in the UK by 2050. But, although individual land-based machines may be smaller, and there can be local siting objections, the UK is also very well suited to onshore wind, which is backed by 78% of the public.
There is already a new 80 turbine scheme planned on-land in Scotland and community-scaled/locally owned projects too. Will there soon be more of all sorts elsewhere around the UK, as well as in the EU, which already has 187GW? Will more be welcome, despite them being more visible? And, more positively, given that they are easier to build, install and maintain, will they suffer from inflationary cost spirals like offshore projects have just done? We shall see. Along with PV solar, which some say could expand to 70 GW by 2035, wind power of both types is an obvious way for the UK to fight climate change, but, as with all technologies, the funding costs have to be contained.
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