8 September, 2023
BusinessGreen, by James Murray


CfD auction delivers just 3.7GW of new capacity as offshore wind developers refuse to bid, sparking warnings UK is now badly off track to meet its clean energy goals
The government is this morning facing fierce criticism, after it confirmed the latest wave of clean energy auctions failed to attract a single bid from the offshore wind industry.

As had been widely expected, offshore wind developers sat out the fifth round of the Contracts for Difference (CfD) auction, having repeatedly warned the reserve price for the bidding process was too low given increased interest rates and other inflationary pressures.

As a result, the auction was dominated by smaller solar, onshore wind, and tidal energy projects that were together awarded contracts totalling 3.7GW.

The government said the auction set a new record, with the number of successful bids rising from 93 to 95, including the first successful bids from the geothermal energy developers. Officials predicted the new contracts should deliver sufficient clean power for around two million homes.

But the absence of any offshore wind projects meant the results fell far short of the nearly 11GW of capacity secured through last year's auction. It had originally been hoped the latest auction would secure a similar level of new capacity to last year, including around 8GW of offshore wind capacity.

Energy Security and Net Zero Minister Graham Stuart insisted the government remained fully committed to meeting its goal of 50GW of offshore wind capacity by 2030.

"We are delighted that our first annual Contracts for Difference auction has seen a record number of successful projects across solar, onshore wind, tidal power and, for the first time, geothermal," he said. "Offshore wind is central to our ambitions to decarbonise our electricity supply and our ambition to build 50GW of offshore wind capacity by 2030, including up to 5GW of floating wind, remains firm. The UK installed 300 new turbines last year and we will work with industry to make sure we retain our global leadership in this vital technology."

He also defended the government's track record, arguing that the latest CfD round "builds on years of renewables growth under this government". "Just seven per cent of our electricity came from renewables in 2010, yet in the first quarter of this year it reached 48 per cent and this first annual auction will allow us to go further in powering more of Britain from Britain," he added.

However, industry and environmental groups responded angrily to the news, warning the failure to boost the offshore wind energy pipeline has dealt a major blow to hopes of meeting the government's target of operating a net zero emission power system by 2035. Experts also warned the inability to secure anticipated levels of new clean power capacity would undermine UK energy security and lead to increased costs for billpayers.

Frustrations within the industry were particularly acute given developers have been warning for months that the maximum price set by the government for the auction failed to reflect the higher material and labour costs they are facing, as well as the recent increases in the cost of capital.

"The failure to award a single contract for offshore wind in the latest round is the direct result of the government's complacency and incompetence in the rules they set for the latest auction," said Sam Richards, founder and campaign director at Britain Remade. "This catastrophic outcome will cost hard-pressed billpayers £1bn a year.

"Because of the war in Ukraine the costs of core materials used in offshore turbines such as steel, aluminium and copper have skyrocketed, as they have for businesses across the economy. Despite this, Ministers and mandarins decided to ignore warnings from the industry that this would mean, for a short time, the cost of offshore wind would rise - while still being significantly cheaper than new gas plants.

"By capping the price the sector could bid at too low, government set it at a level that made it impossible for investors to meet their costs. This will condemn consumers to higher bills than necessary and means Britain loses out on vital jobs and billions in investment."

Dan McGrail, CEO at trade body RenewableUK, said the failure to secure any new offshore wind was "a major blow for consumers that could, and should, have been averted".

"Industry has warned that rising costs should have been properly priced into this auction," he added. "If the UK isn't offering prices that allow investors to make a return, they will simply invest elsewhere. These results should set alarm bells ringing in Government, as the UK's energy security and net zero goals can only be met if we have offshore wind as the backbone of our future energy system. We need the government to show that the UK is open for business… It's not too late to get back on track, but without urgent changes, we risk pricing ourselves out of the global race for clean energy investment."

Critics also warned the lacklustre auction results had dealt a major blow to the UK's efforts to bolster energy security and would likely result in higher energy bills for households and businesses.

A snap analysis from the Energy and Climate Intelligence Unit (ECIU) suggested the failure to secure bids from the 8GW of offshore wind projects that have planning permission but lack a CfD could cost billpayers between £1bn and £1.5bn a year. The think tank explained that even when rising costs for offshore wind developers are taken into account, new offshore wind projects are expected to deliver power that is considerably cheaper than that from gas-fired power plants that are expected to deliver power at around £100/MWh in the coming years.

"The key point here is that even with inflation, offshore wind is still about a third cheaper than gas power stations with the price of gas set to remain higher than before the crisis," said Jess Ralston, Energy Analyst at ECIU. "The more renewables, the less gas you have to buy. By failing to back offshore wind, the government has added around £1bn a year to energy bills in coming years. Combine this with the fudge on lifting the onshore wind ban, and the government is going backwards on easing the energy bill crisis. New oil and gas licences don't bring down bills. Offshore wind farms do. Will the government now try to rerun the auction at a reasonable price?"

Government sources contested ECIU's analysis, insisting they "did not recognise" the £1bn figure and arguing that the CfD regime was designed to protect billpayers and ensure new capacity was secured at competitive prices.

The government indicated it would now review the CfD contract regime ahead of next year's auction round.

"The government reviews its approach ahead of each Contracts for Difference round and, with the introduction of annual auctions, project developers, including from the offshore wind industry, will now have more frequent opportunities to participate," it said. "This will also allow the government to respond more quickly to ensure the scheme continues to support the sector, maintain investment and continue its success.

"The government is already gearing up for the sixth round of auctions in 2024 - which will be the second annual auction - and looks forward to future participation of offshore and floating offshore wind."

However, the government will face growing calls to come forward with a more urgent response to fears that offshore wind development could stall, especially in the wake of developer Vattenfall's decision to pause a flagship project that was previously awarded a CfD. The company announced earlier this summer that it was halting the 1.4GW Norfolk Boreas project, arguing that cost increases of around 40 per cent meant it could no longer be confident of a return at the price set through its CfD. Industry insiders have warned that a number of other developers are considering whether they can still proceed with projects awarded contracts in previous auction rounds.

Doug Parr, policy director at Greenpeace, said the latest auction results were the "biggest disaster for clean energy in almost a decade". "Thanks to cost pressures and inept government policy, this auction round has completely flopped - denying bill payers access to cheap, clean energy and putting the UK's legally binding target of decarbonising power by 2035 in greater jeopardy," he said. "It leaves the UK more dependent on expensive, imported fossil gas.

"Offshore wind is one of the cheapest and cleanest forms of power there is, but in an effort to save consumers pennies on their energy bills, the government is costing them pounds. We need urgent reforms to the way these contracts are awarded and smart changes in government policy to unlock private investment and remove planning bottlenecks. If they don't, the new renewables - which are essential for lowering bills, increasing energy security and slashing emissions - simply won't get built."

The government also faced fierce criticism from political opponents, with Shadow Energy Security and Net Zero Secretary Ed Miliband warning households were now facing "an energy security disaster and a £1bn Tory bombshell that will push bills up for hardworking families".

"The Conservatives have now trashed the industry that was meant to be the crown jewels of the British energy system - blocking the cheap, clean, homegrown power we need," he said. "Ministers were warned time and again that this would happen, but they did not listen. They simply don't understand how to deliver the green sprint, and Rishi Sunak's government is too weak and divided to deliver the clean power Britain needs."

There was better news, however, for onshore renewables. Half of the total new capacity secured through the auction came from new solar projects, while onshore wind projects are set to deliver almost 1.5GW of capacity with the number of projects more than doubling from the 10 awarded contracts in last year's auction.

The latest round also saw a £10m ringfenced budget for tidal stream projects that helped return 11 projects, with a record capacity of over 50MW, while there were three winning bids from geothermal developers for the first time in the scheme's history, totalling 12MW of capacity.

The government insisted that the absence of any bids from offshore and floating offshore wind developers was "in line with similar results in countries including Germany and Spain, as a result of the global rise in inflation and the impact on supply chains which presented challenges for projects participating in this round".

But critics were quick to note that the Irish government recently responded to industry concerns about cost pressures ahead of its most recent contract auction, and as a result was able to secure 3GW of new offshore wind capacity at competitive price.