Energy industry leaders have issued a stark warning that the United Kingdom may miss a critical target for expanding its offshore wind power capacity. This caution comes ahead of the imminent announcement of results from a government auction, which is expected to yield disappointing outcomes.
Lack of Interest in the Auction
Multiple sources within the energy industry have disclosed to Sky News that the auction, the results of which are anticipated to be made public this Friday, has failed to attract significant interest from potential bidders.
Insiders reveal that the root cause of this lackluster response lies in the government’s decision to set a maximum price for generators that is deemed too low. This pricing structure does not adequately account for the escalating expenses associated with manufacturing and installing offshore wind turbines.
The industry has been grappling with soaring costs, including a 40% increase in steel prices, supply chain disruptions, and higher financing costs. As a result, several companies, including SSE, the UK’s largest renewables generator, have opted out of the auction. According to one source, the number of prospective bidders hovers “between two and zero, with expectations at the lower end of that range.”
The Mechanism Behind the Auction
The renewables auction is part of an annual government initiative aimed at stimulating private sector investment in various power sources through “contracts for difference” (CfDs).
In this reverse auction process, the government establishes a maximum reference price, essentially capping the amount consumers can be charged. Typically, generators bid below this reference price to secure contracts for supplying power over a 15-year period. Under the CfD framework, generators receive a guaranteed price for the power they generate, with the government compensating the difference if wholesale prices fall below the agreed-upon rate. Conversely, when wholesale prices exceed the guaranteed price, generators return the surplus to the Treasury.
Challenges Faced by the Industry
The CEO of SSE, Alistair Phillips-Davies, has raised concerns about the viability of the current auction, citing a price cap of £44 per megawatt-hour (MW/h), only slightly higher than last year’s price. According to Phillips-Davies, this pricing structure would render their project economically unfeasible.
He further emphasized the need for immediate government intervention to improve market conditions for the renewables sector. Phillips-Davies proposed measures such as expediting the withdrawal of additional taxes on renewables profits in 2024 (instead of 2028), extending capital allowances to compete with the US subsidy program known as the Inflation Reduction Act (IRA), and ensuring a more realistic price cap in the next auction round.
The Impact on Offshore Wind Expansion
The current auction, formally known as Allocation Round 5 (AR5), is anticipated to attract bids for solar and onshore wind capacity. However, the failure to secure substantial new offshore wind capacity would deal a significant blow to the government’s ambition of achieving 50 gigawatts (GW) of offshore wind power by 2030.
Political and Economic Implications
This situation intensifies the ongoing debate over the true costs of achieving net-zero emissions for both consumers and the public purse. Industry insiders assert that officials were repeatedly cautioned by the sector that the auction would falter unless prices were adjusted upward.
Shadow energy secretary Ed Miliband criticized the government’s inaction, stating that ministers “had put their fingers in their ears.”
The Importance of Offshore Wind
Offshore wind constitutes a critical component of the UK’s renewable energy supply, contributing 40% of the country’s electricity in the previous year. Meeting the offshore wind target is pivotal to the broader objective of achieving net-zero emissions by 2050.
Past auctions have successfully bolstered offshore wind capacity, with last year’s round securing 7 GW of capacity from five operators. However, some projects, including one operated by Vattenfall, have been suspended due to rising industry costs.
The Road Ahead
Lisa Christie, UK country manager for Vattenfall, stressed that the current investment model no longer aligns with economic realities. She cited factors such as the Ukraine conflict, inflation spikes, increased capital costs, and rising commodity prices as contributors to the industry’s challenges.
The renewables sector advocates for a higher price point in the current auction, asserting that even with an increased price, offshore wind remains significantly more cost-effective than fossil fuel alternatives. Last year, wholesale gas prices peaked at nine times the rates of offshore wind strike prices. Moreover, wind farms operating under CfDs have been returning substantial sums to the Treasury since the Ukraine crisis drove up electricity prices.
Calls for Swift Action
The urgency of the situation has prompted calls for swift government action to ensure the future success of offshore wind initiatives. Major industry suppliers, including Hitachi, emphasize the need for the UK to compete with more generous subsidy programs worldwide.
Laura Fleming, the UK managing director of Hitachi, highlighted the importance of creating an investment climate that signals openness for business. She compared the UK’s circumstances to the US Inflation Reduction Act (IRA) and the European New Green Deal, underscoring the need for the UK to maintain its competitive edge.
As the results of Allocation Round 5 (AR5) loom and the offshore wind industry faces headwinds, the future of the UK’s renewable energy ambitions hangs in the balance. Addressing the pricing challenges and bolstering investor confidence are imperative steps to secure a sustainable offshore wind future for the nation.