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Wind contracts herald arrival of new energy paradigm

Tue 12 Sep 2017 by David Foxwell

Wind contracts herald arrival of new energy paradigm

Astounding is not a word that is often used in the energy industry about contracts, but it is the right word for those handed out for new offshore windfarms in the UK this week. The low price of the contracts really is astounding, but more astounding still is the effect they will have in the renewable energy industry and energy sector as a whole, in the UK and elsewhere.

As Tom Edwards, a senior consultant at Cornwall Insight succinctly put it “The conclusion from today is this: the epoch of renewables as the most cost competitive technology has arrived. Even without the added and essential benefit of its zero-carbon footprint, policymakers would – at these prices – be hard pushed not to press ahead with bigger growth in renewables on cost grounds alone, even if there was not a legally binding carbon budget to achieve. There could be no greater accolade than that. A new paradigm has arrived.”

The low prices that won the latest round of the UK contract for difference (CfD) auction are great news for the industry, the planet and UK bill payers. After the low results seen in the last year from Germany, the Netherlands and Denmark, there was hope the trend would continue in the UK, but perhaps, not so much expectation.

“We have got some significantly better results than many of us dared to hope for,” BVG Associates director Giles Hundleby told OWJ. “The low prices have also allowed more capacity to be funded – nearly 3.2 gigawatts (GW) – when the best many were expecting was just over 2 GW.”

As Mr Hundleby noted, the levelised cost of energy implied by the CfDs demonstrates they are on the same trend with those we have seen over the last year at Borssele 3 and 4 in the Netherlands and Kriegers Flak in Denmark. “Most remarkable is that Moray Firth has been able to be as competitive as Hornsea 2 – presumably both of these are planning to exploit their extra time to use the same future large turbines as have been mooted for Borssele 3 and 4 and Kriegers Flak,” Mr Hundleby said. “Surely with this really excellent result, the UK government will get solidly behind even more offshore wind capacity.”

Mr Edwards agreed that the clear winner of this auction mechanism looks to be the 860 megawatt (MW) Triton Knoll project, which bid into 2021-22 and which – by extrapolating from the auction rules – must, he said, have had its clearing price uplifted by fuelled technologies to a price of £74.75/MWh (US$98.54).

Two other offshore windfarms also cleared, the 1.3 GW Moray East offshore windfarm and the 950 MW Hornsea windfarm, both at £57.5/MWh for 2022-23. “Because of the way these auctions work this implies that one of these windfarms is highly likely to have bid in even lower than this price and was uplifted,” Mr Edwards said.

“The low offshore wind prices should come as no surprise. Offshore wind auctions and tenders on the continent have been clearing lower than estimated levelised costs for some time, with some German auctions clearing close to the expected wholesale power price. There had been speculation that deeper water, construction risks, higher transmission and connection costs and the exchange rate could all have been factors leading to higher prices than in peer European markets. As it happens, it seems we are now reaping the same benefits of acquired learning and greater efficiency in the wider European offshore wind market, which has a mature supply line, larger turbines and plenty of valuable experience at sea.”

Moreover, as Mr Edwards also highlighted, the winners are not confined to this auction. The Neart Na Gaoithe project, that won a CfD in the first CfD allocation round must also be set to benefit. Several years of legal delays due to a dispute with the RSPB has probably deferred their supply chain commitment, and now they could take advantage of clearly reduced turbine costs but with the benefit of a CfD priced at £114.39/MWh in 2012 money.

“The resonance of these prices should increase the incentives for government to run further CfD auctions. If offshore wind is now lower than the levelised cost of nuclear and other traditional thermal stations, the decarbonisation of our network looks set to accelerate so long as policy allows it to,” Mr Edwards concluded.

 

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