This article was written by Will Sheard, director of analysis and due diligence, engineering consultancy firm, K2 Management.
Offshore wind energy has long been recognized as one of the most efficient means of delivering renewable energy at scale, and it has rightly been a point of focus for developers looking to set up shop in the UK. Alongside ‘mega-projects’ such as Dogger Bank, offshore wind has demonstrated impressive reductions in its levelized cost of energy over the past decade, setting the technology up to be a promising component of the country’s energy transition.
“From 13.7GW to 50GW by 2030,” said the government. And that almost felt possible, for a time — but in recent months, weeks, and most pressingly days, many hopes and ambitions of that variety have been dashed on a variety of sharp spikes in costs, along with questionably plunged strike prices which do not adequately reflect or account for the challenges associated with building profitable offshore wind projects in today’s market.
We saw last Friday (8 September) that Auction Round 5 (AR5) for the UK’s Contracts for Difference (CfD) scheme failed to secure a single successful offshore wind bid. Despite the government’s promise to consider non-financial factors in the auction process, prior warnings about the more fundamental issue of low strike prices for short-term project support remained unresolved, leading to the current outcome. These prices were set months ago, and did not respond or adapt as the situation became apparent.
The price caps – £44/MWh for fixed-bottom turbines and £116/MWh for floating platforms – were simply too low; particularly amidst a reported 40% cost increase across the industry. Supply chain woes spanning growing material and labour costs, as well as tariffs on imports, has created an eggshell-floored market of cautious players who are not just hesitant to, but often cannot, put their best foot forward. Vattenfall’s cancellation of the Norfolk Boreas project in July was, in many ways, a warning beacon of things to come.
While it is commendable that the latest round of awarded CfDs is set to deliver 3.7GW of clean energy through nearly 100 separate projects in tidal, onshore wind, and solar, it is crucial to recognise that offshore wind remains a cornerstone of the UK’s renewable energy strategy.
In Auction Round 4, offshore wind secured 7GW: a few large offshore wind projects easily match the output of numerous smaller projects at a comparable strike price. Their absence from the AR5 results has created a gaping void of opportunity, not only to leverage the full generation potential of this technology in a country with bountiful wind resource off its shores, but also to create thousands of green jobs that would be vital for every stage of projects’ lifecycles for years to come.
A modest increase in assumed offshore wind costs, while still keeping the industry attractive, would have gone a long way in addressing the current challenges faced by offshore wind developers. Many are asking if this oversight warrants a full critical evaluation of the current CfD model, and noting it raises questions about the adequacy of the current model for the wind industry.
The CfD mechanism will remain a vital tool for securing stable electricity pricing and supporting the growth of offshore wind projects, but it must adapt. Revisiting the strike prices to ensure they accurately reflect the economic realities of offshore wind development, as well as a focus on ensuring the timeliness of government response to industry voices and their concerns, must be key.
The government has expressed its ongoing commitment to offshore wind and its willingness to collaborate with the industry — while these affirmations are encouraging, they must be backed by concrete actions.
A positive, though predictable, outcome of AR5’s failure is the simple fact that it is a learning experience, which should spur a renewed sense of purpose in all the relevant stakeholders, from cabinet to boardroom. We all now know what must be done to ensure that offshore wind is made an attractive and sustainable option for the UK. It’s not a race to the bottom. It’s about making sure the numbers add up for those ultimately responsible for building these projects, and helping them do it consistently, to a high standard, and in a timely fashion, so we can realistically hit our multi-gigawatt targets.
So, overall, the absence of CfD awards for offshore wind projects in AR5 is a disappointment and a missed opportunity, which highlights the urgent need for a more comprehensive evaluation and adjustment of the CfD model to ensure that it remains effective in supporting offshore wind. The government’s words of commitment must be followed by meaningful action to secure the UK’s position as a leader in the global energy transition. As we gather ourselves and move boldly on from the fallout, we can only believe that it will.
