After the developer no-show in the recent AR5 auction, Westminster hopes sweetening its next Contracts for Difference auction will help re-accelerate plans to have a target 50GW of sea-based plant installed by 2030, writes Maria Holm Bohsen
What’s the news?
The UK government has announced it will raise the administrative strike price for offshore wind to £73/MWh ($90/MWh) for the next contracts-for-difference (CfD) auction, allocation round (AR) 6, set to open next March. This is 66% higher than the £44/MWh (2012 values) cap offered this autumn for AR5, which was boycotted by developers on the grounds that present-day macroeconomics conditions made projects unviable at these price levels. AR6 also ups the cap for floating wind projects to £176/MWh, 52% higher than AR5’s £116/MWh.
For the first time, offshore wind will also be granted a separate funding ‘pot’ in recognition of the high number of projects ready to participate, which Westminster hopes will create a strong pipeline of developments to accelerate construction toward its 50GW by 2030 target.
Also announced – though not taking effect until 2025’s AR7, the UK model CfD will evolve from being based solely on the outcome of a price-driven competitive auction to include ‘non-price’ factors focusing on environmental and social impact – called Sirs (sustainable industry rewards) – in awarding of new capacity. Through the shift, which the government promises will make AR7 the “cleanest, most impactful” auction to-date, developers will receive additional payments for reducing carbon emissions in their supply chains, or if they improve a project’s socio-economic benefits.
What’s the backstory?
Until this autumn’s AR5 auction, the UK’s CfD tenders has been feted as a great model for getting projects in the water. Since the subsidy auctions started in 2014, 17GW of offshore wind has been awarded CfDs, and the majority of this is already in the water or under construction while around 5GW is still under development.
Events this year have forced the UK government to act on what the industry has been warning of for some time, that CfD auctions were no longer reflecting inflation-hit project costs and rising interest rates. First cracks showed this summer when Sweden’s Vattenfall ‘paused’ its 1.4GW Norfolk Boreas – which won a CfD in AR4 in 2022 – and walls collapsed in September when no bidders turned up to AR5, citing the too-low strike price.
What does this mean for UK offshore wind?
The developer no-show at AR5 presented a serious bump on the road for UK offshore wind, but not necessarily a roadblock – if next year’s AR6 is more successful in attracting bidders. Belatedly, the government has listened to industry, as can be seen in the 66% higher strike price (£73/MWh versus £44/MW) and dedicated offshore wind 'pot’, creating a route to market for some of the developments in the 60+GW pipeline of leased project.
‘The UK government has been forced to act on what the industry has been warning of for some time, that CfD auctions were no longer reflecting inflation-hit project costs.‘
Maria Holm Bohsen
Head of Research
Time and capacity need to be made up after the no-show AR5 round. Plenty of offshore wind projects have secured a lease, which is the first step, but a viable route to market is needed for the arrays to be built. With almost 15GW offshore wind in the water, 8GW under construction and around 5GW with secured CfDs under development, UK is facing a gap of 22GW to meet the 50GW target by 2030.
Question marks hang over routes to market for floating wind, which has to make the leap from 80MW turning today to 5GW targeted by the end of the decade. AR4 was the first auction to include floating wind and in 2022 AR4 awarded a CfD with a strike price of £88/MWh to the 32MW TwinHub floating wind demo. The failure to attract any floating wind bidders in AR5 could jeopardize UK’s 5GW target, so AR6 will play a central role in paving the way for floating wind in British waters.
What’s been the response?
UK offshore wind’s great-and-good trumpeted their welcome of the government’s announcement.
Tom Glover, RWE’s UK country chair, said it was a “positive step towards maximizing the UK’s clean energy potential, for ensuring sustained lowest prices for consumers and creating good quality jobs, that showed “recognition of broader international global supply chain and inflationary cost pressures within the sector”.
Duncan Clark, Ørsted’s UK chief, said the higher strike price gave “a clear indication from the government that offshore wind can and will be the backbone of our future energy mix”. While Halfdan Brustad, VP for UK Renewables at Equinor, highlighted the “right CfD parameters” would mean the UK remained "an attractive market in a globally competitive environment”.
ScottishPower CEO Keith Anderson said the announcement “signaled the government is listening” but cautioned the “real test of that ambition will come when the overall budget for the next auction round is set next year”.
Matthieu Hue, EDF Renewables' UK CEO, said CfDs were “fundamentally a good mechanism and a sustainable administrative strike price will drive investor confidence, economic growth and lower electricity bills”.
What could happen next?
The government’s strike price increase and dedicated pot of money for offshore wind is an attempt to stay on track towards the 50GW target in 2030 and to keep the UK as a world leader in clean energy.
Based on the sector’s warm welcome Aegir foresees the developers return to bidding and vying for CfDs. Thought £73/MWh (2012 values) marks the highest possible strike price, the final figure will be determined by the competition between the participating players. What’s probably of greater interest to the UK government is the resulting power production capacity created. This will largely be determined by the budget available to support offshore wind in AR6 – which has yet to be published. So, with the administrative strike price announced, the next number eagerly awaiting by the industry is the AR6 budget.
• Image at top shows Iberdrola's 714MW East Anglia 1 wind farm in the UK North Sea, which was commissioned in 2020 (FOTO Iberdrola)
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This article was first published in Aegir Insights' intelligence newsletter, Beaufort.
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