This year’s round of new clean power contracts has, for the first time ever, failed to procure any new offshore wind. This is bad news for consumer bills, investment in green supply chains, energy security and economic growth.
So why is it that the UK success story is starting to look less compelling? And is it fixable?
To answer those questions, we need to look at what has changed in the past year that made investment conditions worse and altered project economics. The answer is a combination of economics and politics. Let’s look at economics first.
Offshore wind is a capital-intensive industry, so when the cost of building and borrowing goes up, developer margins take a hit. If, as we’ve seen in the past year, those costs rise whilst revenues are constrained by low CfD strike prices and windfall taxes, it makes it difficult to make project economics stack up.
This is an even bigger challenge for new projects in which finance costs make up a substantial portion of the overall cost of a new wind farm. In the 2022 CfD auction, we saw exceptionally low strike prices of just £37/MWh, which would not have been so problematic in the absence of economic volatility. Instead, we saw inflation spike to a 41-year high of 11% inflation and interest rates quadrupling to 5%. This double-whammy has been made worse by rampant inflation in some of the key global commodities and components industry relies on – steel prices alone are estimated to have jumped 40% in the past year. As a result, industry has reported the cost of turbines rising 20-40% in the last 18 months.
In spite of this, the 2023 CfD parameters set a maximum price of £44/MWh for offshore wind in the auction – £2 lower than the maximum price in 2022). With the prospect of small to non-existent margins from bidding at such low prices and a lack of confidence that future auction parameters will be dictated by economic reality rather than political pressure, it is no surprise that this year’s auction did not attract bidders from offshore wind.
If all of this is making you think that perhaps offshore wind is just too expensive and difficult, we need to remember that the last 2 years have also seen the cost of alternatives skyrocketing too. Even if costs in offshore wind rose 50% relative to the 2022 auction price, it would still be 40% cheaper than power from new nuclear or gas. And let’s not forget that in the last year Government has had to give out the single largest energy subsidy in UK history - £47bn in bill support to subsidise the cost of gas to households and businesses.
A successful offshore wind auction just across the water in Ireland in June secured 3GW of new offshore wind at a price equivalent to £75 per megawatt hour (MWh). Let’s be clear, prices need to increase if we want to attract sustainable investment into UK energy infrastructure – and that’s a trend seen across the world. Renewables still offer long-term, affordable power that makes the UK more energy secure. But the problem is that at present, we’re pricing ourselves out of the global race for green investment. So how do we fix it?
Catching Up in the Global Race
Which brings us to politics. The economic realities described above did not come as a surprise to government. In fact, industry had been warning them for many months that a continuous pursuit of lowest possible prices in the current economic climate would be detrimental to an industry which has made the UK a world leader in decarbonisation, innovation and market design.
This focus on driving down costs comes on the backdrop of a more competitive international landscape and much higher global demand for resources and know-how in the sector. The US and the EU also want to bring online cheap, homegrown renewable energy, but they have actually put in place frameworks that will allow them to do so - a long-term set of incentives for building and manufacturing in their respective geographies, which will attract investment and create job opportunities. A clear focus on bolstering areas of the supply chain where they have a competitive advantage, or which are strategically important. A focus on the non-price benefits that building renewables can generate. Meanwhile, the UK government is tinkering at the edges and refusing to set out a comprehensive plan to respond and compete for global investment. A more nimble and strategic approach to state aid is a Brexit dividend that is yet to materialise.
All of this is bad news for UK supply chain companies too, where many of the economic growth and employment opportunities of the energy transition come from. Having invested in ramping up capacity and creating manufacturing facilities in places like the Hull and Isle of Wight, these companies are now facing an uncertain project pipeline. We know that growing our supply chains is essential if we are to meet the 50GW target for offshore wind, but how can the investment in the UK materialise when the prospect is a series of boom-and-bust cycles in offshore wind development.
Energy Security in a Dangerous World
While industry and Government often talk of abstract targets, the last 18 months have shown us the real cost of failing to secure our own energy supply and relying on fossil fuels imported from global markets. Meeting targets for home-grown renewables is how we really deliver cheaper energy and cut the gas imports that have driven bills to record highs. We know that to keep on track for a clean, fossil-free electricity system we need to not only meet the 50GW target but go even further. We’ll need at least 72GW of offshore wind by 2035.
And it’s not simply a case that if we fall behind on offshore wind, we can just bump up generation from other low carbon sources. Offshore wind is an incredibly good fit for the UK, given our wind resource and the scale at which offshore wind farms can be built. Every GW of offshore wind generates over 5 times more power than a GW of solar power. To replace the power from a single large offshore wind turbine, you’d need to build 82MW of solar panels. And from the point of securing a contract, an offshore wind farm can be up and generating within 3 years, compared to the 10-year constuction time for the UK's newest nuclear power station. No matter what level of nuclear, solar or onshore wind capacity on the system, the National Grid forecasts we’re still going to need huge amounts of offshore wind to end our reliance on fossil fuels.
A clean, secure and low-cost energy system in the UK will rely on offshore wind as its backbone – and failures like this auction will keep us dependent on expensive fossil fuel imports for longer.
Too Little, Too Late?
Given the international landscape and the opportunity to build an affordable, secure electricity system, the government should double down on building on our competitive advantage on offshore wind: having been a first mover in this sector, the UK has already demonstrated that you can deploy, innovate and create good quality jobs in the sector, more so than any other country. We are an industry that can grow to support 100,00 jobs by the end of the decade and channel billions of investment into towns and cities across the UK – especially our port communities.
The latest auction results clearly show that we cannot simply take this for granted – government must face the economic realities and ensure the pursuit of lowest possible cost in the short term doesn’t end up costing us even more further down the line.
But it is not too late. A bold response from Government to fix the investment framework and compete for global investment in green energy supply chains could restore our position as an international leader in clean energy. A globally attractive investment framework, with competitive support and sustainable prices could yet secure the offshore wind projects we missed out on in this auction and set us back on track for a secure, clean and affordable energy future.
Ana Musat, Executive Director for Policy & Engagement, RenewableUK