Register for a free trial
Social
Offshore Wind Journal

Offshore Wind Journal

CfD auctions see new paradigm established in UK energy sector

Sat 21 Oct 2017

CfD auctions see new paradigm established in UK energy sector
The government in the UK has confirmed a commitment to 10 GW of new capacity, possibly more

Recent weeks have been particularly important ones for the industry in the UK, with publication of a clean growth strategy, record low auction prices and a government commitment to build at least 10 GW more offshore wind capacity

 

In October 2017, the UK Government published its long-awaited and much anticipated Clean Growth Strategy, which includes a sector deal for offshore wind that could see more than 10 gigawatts (GW) of new offshore wind capacity developed.

The Clean Growth Strategy aims to improve the route to market for renewable technologies such as offshore wind by committing up to £557M (US$736M) for further ‘Pot 2’ contract for difference (CfD) auctions, with the next one planned for early 2019.

The government confirmed its commitment to work with industry on an “ambitious” sector deal for offshore wind, which could result in 10 GW of new capacity, with the opportunity for additional deployment if this is cost-effective, built in the 2020s.

The latest auction in the UK saw the cost of new offshore wind fall by 50% compared to the first auction held in 2015 and resulted in over 3 GW of new generation.

RenewableUK’s chief executive Hugh McNeal said the announcement “secures cheap, home-grown, clean energy for the UK”. He said the government is helping to build a world-leading offshore wind industry that can power a clean industrial revolution, creating new jobs and attracting billions of new investment. “This amazing cost reduction is a reminder of what innovative industry can deliver when backed by competitive auctions,” Mr McNeal said.

As Tom Edwards, a senior consultant at Cornwall Insight, succinctly put it “The conclusion from [the new auctions] 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, policy makers 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.”

“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 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 per megawatt hour (MWh) (US$98.54/MWh).

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, which 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.

Reflecting on the role of the UK Government in supporting offshore wind energy, Lord Adonis, chair of the National Infrastructure Commission in the UK, said being “close to being subsidy-free” was a remarkable success, thanks in no small part to consistent policy from successive governments, which has enabled the industry to develop at scale.

He noted that using auctions to allocate subsidies has also led to competition between developers and reductions in costs. The successful design and execution of these have been a testament to the skill of officials at the Department for Business, Energy and Industrial Strategy (BEIS), the Electricity Market Reform delivery body and the Low Carbon Contracts company – and all this has led to lower bills. “But politicians must also be given credit for supporting the development of offshore wind over the past decade, even when that meant larger subsidies for the early projects,” he said. “The consensus across successive governments to develop the industry at scale has given windfarm developers the predictability they need to find cheap finance and invest in the supply chain to manufacture, install and maintain the turbines.

Peter Ward, a director at Burness Paull, said the recent contract awards had the potential to create thousands of new jobs and provide power for approximately 3.6 million homes. “Given the results that have been achieved, it is not hard to recall attending an offshore wind conference in Aberdeen only a few years ago and hear (what seemed to be) highly aspirational targets of reducing offshore wind development to less than £100/MWh by 2020,” Mr Ward said. “It will be interesting to track the opportunities that arise for local communities and the UK supply chain in light of the government’s overall industrial strategy for offshore wind development. It is to be hoped that, given the size and scale of investment required, a joined-up approach from local, Scottish and UK government can fully realise such benefits,” he told OWJ.

Keith Patterson, a partner at Brodies LLP, told OWJ that, given that the lowest strike price for offshore wind in the first CfD auction was £114.39 (US$152.12), the new prices represented an almost exactly halving of the price in just two years.

“While this price decline looks astonishing, it is only half the story – the decline in subsidy costs is even greater,” he said. “The market price fluctuates currently within a range of about £40–45/MWh. A strike price of £57.50 represents an average subsidy of around £15/MWh, while £114.39 represents a subsidy of around £70–75/MWh. Therefore, while prices have been cut in half, the subsidy cost is less than a quarter of the subsidy cost only two years ago.”

Mr Patterson said the policy implications have yet to sink in, and Professor Dieter Helm’s report into the cost of energy – which the BEIS recently commissioned and is due shortly – will make “interesting reading”.

Recent whitepapers

Related articles

 

 

 

 

Knowledge bank

View all