After a review of the evidence, including the impact of global events on supply chains, the government has raised the maximum price offshore wind projects can receive in the next UK Contracts for Difference (CfD) next year. Infamously, in the last round in September, with gas prices and materials costs rising, the price cap was set too low for offshore wind and there were no bids for projects – which came as a big shock since it had been doing very well. Some predicted the ‘end of wind power as we know it’, and it certainly was worrying, with some plans for new projects being halted.
However, on reflection, what was arguably more worrying was that the government had been warned about this problem, but had done little about it. Thankfully, now it has. So for the next round, the maximum strike price has been increased by 66% for offshore wind projects, from £44/MWh to £73/MWh, and by 52% for floating offshore wind projects, from £116/MWh to £176/MWh, also for Allocation Round 6 (AR6).
The government says ‘this will help ensure projects are sustainably priced and economically viable to compete in AR6, building on the success of previous CfD auctions. These have so far awarded contracts totalling around 30GW of new renewable capacity across all technologies since 2014’. It adds that ‘in AR6, offshore wind will also be given a separate funding pot in recognition of the high number of projects ready to participate. This will ensure healthy competition among a strong pipeline of projects, helping the UK deliver on its ambition of up to 50GW of offshore wind by 2030, including up to 5GW of floating offshore wind’.
Will that work? Not everyone is sure. It does make offshore wind look expensive, around £100/MWh in current money index linked, unless the actual bids in the event come out lower. They may well do. We shall see next year. Inflation rates may fall. They had partly been due to the impact on gas prices of Russia’s invasion of Ukraine, and that had knock on effects even in countries like the UK that didn’t rely on Russian gas imports. And so it also hit the cost of most energy – and not just renewables. But that may change, even if energy retail prices are still high most places.
Hopefully renewables will now start to change that, by getting cheaper again- that does seem likely for PV in some cases and possibly also for offshore wind. To help them in the next phase in the UK, we need to improve the CfD system. But the current plan may not be enough. Energy expert Adam Bell has suggested that the Government ‘should move from a budget for each round to an energy volume it wishes to contract, informed by the work of the Future System Operator. The actual mechanics of the auction do not need to meaningfully change to achieve this. Bids for a volume at a price can still be stacked up, but once the volume cap is breached the auction closes. This enables Government to be more confident it can hit its targets’.
The support systems in some EU countries may have weathered the cost inflation storm a bit better than the UK, and the USA’s Inflation Reduction Act is said to have been successful in protecting and indeed promoting renewables. Of course, the US does not have much of an offshore wind programme yet, but the Biden Administration is now committed to increasing its capacity from 42 MW in 2022 to 30 GW by 2030. However, that could cost over $100 billion. So getting costs down is important. Given the general rise in material costs, offshore wind in the U.S. is said to be nearly 50% more expensive now than in 2021, so there’s a way to go. But it is trying.
Back in the UK, as we have seen, although the UK government has responded to the CfD cap problem, it does not seem to want to do much more than adjust the price target and leave it up to the market to sort. To be fair, the recent Autumn Budget did allocate £960 million to clean energy manufacturing, as part of £4.5 bn for strategic manufacturing sectors, to be available for five years from 2025. So some of that is meant for clean energy via the UK’s Green Industries Growth Accelerator, which will invest in UK supply chains across carbon capture, utilisation and storage, electricity networks, hydrogen, nuclear & offshore wind. But, there’s not going to be very much from this for offshore wind .
By contrast, in terms of general government financial support, the big money is mostly being reserved for some of the other technologies, with nuclear and Carbon Capture Utilisation and Storage both being heavily backed in the Budget report. Small Modular Reactors have already been given some state support (e.g. for Rolls Royce) and the Budget sees Great British Nuclear attracting co-funding for rapid SMR expansion. At one stage there was talk of £20bn being needed for pump priming.
However, moving on to bigger things, the Budget says that ‘while the initial focus of GBN will be on Small Modular Reactors, further large Gigawatt-scale projects will also be considered subject to value for money, relevant approvals & technology readiness and maturity, to help deliver net zero’. It goes on ‘nuclear energy will also be included in the green taxonomy, subject to consultation, encouraging private investment.’ And it says ‘This package is essential for the transition to net zero & confirms the government’s support for the growth of these critical green industries in the UK’.
In addition, the Budget report says the government will ‘provide up to £20 billion available for early deployment of Carbon Capture, Utilisation and Storage’, to help meet the government’s climate commitments, with a shortlist of projects promised soon, with more possible the follow. So offshore wind may get some backing, and the new CfD will help, but it has rivals- CCUS and nuclear- which seem likely to get more backing. That is despite them being arguably more expensive, less viable and slower to deploy. For example, the Institute for Energy Economics and Financial Analysis says that, with its initial emphasis on blue hydrogen, the CCUS plan could potentially deep the country’s dependence on fossil gas. And Sir John Armitt, chair of the National Infrastructure Commission, saying ‘we don’t see nuclear as really having a significant part to play in any new stations other than Hinkley before 2035.’ Meanwhile, under a new Crown Estate leasing round, three floating wind farms will be located off the coast of South Wales and South West England, with a combined capacity of up to 4.5GW. This will be the first time floating wind farms have been deployed on a commercial scale.
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