11 September, 2023
International Business Times, by Pragati Singh
The United Kingdom's ambitious renewable energy goals are facing a significant setback as offshore wind developers chose to abstain from the latest government auction. Developers cited concerns that the offered price did not adequately account for the rising costs within the industry, a trend affecting wind projects globally.
This development is particularly troubling for the UK's target of achieving net-zero emissions by 2050, which hinges on the expansion of offshore wind capacity to 50 gigawatts (GW) by 2030, a stark contrast to the current 14 GW capacity.
In a similar auction held in 2022, offshore wind projects had been the primary beneficiaries, securing funding for 7 GW of capacity. However, in the most recent auction, developers refrained from submitting bids, signalling a substantial shift in the industry's sentiment. The Department for Energy Security and Net Zero attributed the lack of awards for offshore and floating offshore wind to the global surge in inflation and its impact on supply chains.
The offshore wind sector has witnessed a significant increase in costs, prompting developers worldwide to either withdraw from projects or seek renegotiations. Notably, leading developer Orsted recently announced substantial impairments to its US projects, underscoring the challenges facing the industry.
Quality issues with turbine manufacturing, as technology scales up, have also taken a toll on the sector's earnings. Despite these challenges, Energy and Climate Change Minister Graham Stuart affirmed the UK's commitment to offshore wind, emphasising its role in decarbonising the electricity supply and the goal of achieving 50 GW of offshore wind capacity by 2030, including up to 5 GW of floating wind.
The UK's Contract-for-Difference (CfD) scheme, launched in 2014, offers renewable power developers a guaranteed price for their electricity. However, it imposed a price cap of £44 per megawatt-hour (MWh) for offshore wind bids, down from £46/MWh in the previous round.
This decision has been criticised by the renewable energy campaign group Britain Remade, which argued that the price cap set by the government was too low, making it financially unviable for investors to meet their costs. They estimated that the absence of new offshore wind capacity would cost consumers £1 billion per year.
The government had initially offered £227 million in subsidies to incentivise renewable power projects. This amount was increased in August following warnings from developers that more funding was required to sustain the industry. Ed Miliband, the shadow energy security and net-zero secretary for the UK's opposition Labour Party, described the auction's outcome as an "energy security disaster".
He criticised the Conservative government, asserting that it had undermined the offshore wind industry, which was meant to be a cornerstone of the British energy system, hindering the nation's access to affordable, clean, and domestically produced energy.
Developers like Germany's RWE and Sweden's Vattenfall have reported a 40 per cent increase in the cost of offshore wind projects. Vattenfall, for instance, paused the development of a project that had received a CfD in the previous year's round due to these cost escalations.
In the latest auction, awards across all renewable technologies amounted to 3.7 GW, a significant decline from the 11 GW of projects that secured contracts in the previous year's round. Solar power projects led the way with 1.9 GW of capacity, followed closely by onshore wind with 1.8 GW.
The strike price for solar reached £47 per MWh in 2012 prices, up from £45.99 in the previous round, while onshore wind prices increased to £52.29/MWh from £42.47. It's essential to note that bid prices for renewable energy CfDs are expressed in 2012 money, with inflation pushing actual prices higher.
The government highlighted that the UK has transitioned to annual auctions instead of biennial ones, allowing developers more frequent opportunities to participate. This shift also provides the government with the flexibility to amend conditions more promptly if necessary, reflecting its commitment to supporting renewable energy growth.