UK ‘failure’ may spark much-needed reset
The lack of offshore wind bids in the UK's fifth Contracts for Difference auction process could spark much-needed reforms and help developers make a stronger case for onshore wind. Richard Heap looks at why this 'failure' might not be so bad.
- No offshore wind projects entered the UK's latest CfD auction
- However, onshore projects totalling 1.5GW won CfD support
- UK policymakers have also committed to loosen planning rules
Unsuccessful. Missed opportunity. Failure.
It did not take long for those in the wind industry to start lamenting the results of the UK’s fifth Contracts for Difference (CfD) auction last Friday (8th September). But while it was a disappointing day for some, we think it could be good for the industry.
The biggest headline was the lack of offshore wind projects among the winning bids. The UK Government had wanted to award CfD support for up to 5GW of offshore wind farms, to help it towards its improbable goal of 50GW offshore wind in UK waters by 2030. That would be up from 14GW installed now.
In the end, it received no offshore wind bids at all. The reason is obvious. Any potential bidders concluded that the maximum strike price for offshore wind, of £44/MWh (in 2012 prices) including the cost of transmission, was too low. Inflation has pushed up costs and strike prices haven’t kept pace.
Inflationary impacts
The UK Government has been warned. Vattenfall stopped work on its 1.4GW Norfolk Boreas project in the North Sea in July because it did not make good financial sense with the CfD of £37.35/MWh (in 2012 prices) that it won in the fourth CfD auction round in July 2022. Two other winners in that round - the 2.9GW Hornsea 3 by Ørsted and 1.1GW Inch Cape by Red Rock Power and ESB - are yet to achieve a final investment decision, so it could get worse.
But, perversely, this may be good for the sector in the long-term.
First, this is a wake-up call that UK policymakers can’t ignore. They will need to include a more realistic maximum strike price for offshore wind in the next CfD tender, which is due in 2024. The system cannot stay as it is.
Second, it shows that offshore wind developers are being sensible about the strike prices they will commit to. In previous auctions, bidders might have bid at unrealistic prices purely to secure sites and grow their project portfolios. It may be that this marks an end of the ‘race to the bottom’.
Third, it may shine a light on the recent German tender, and the problems with uncapped negative bidding. Germany picked four winners totalling 7GW in its latest offshore wind tender in July. That looks like a ‘success’ compared with the UK. However, the winners not only committed to build the projects with no state support, but also have to pay a combined €12.6bn for the sites. This is a cost that either needs to be borne by energy users or the supply chain. Even a system that appears to be working may cause problems for offshore wind.
And fourth, the lack of support for offshore wind may hasten attempts by the UK Government to bring onshore wind back in from the cold. New onshore wind projects in England have been effectively banned since 2015, because of stringent requirements for local community approval that enabled projects to be derailed by only a single objector. This has stifled development.
Unlocking onshore wind
But this fifth CfD round saw the Government award support for 1.5GW of new onshore wind projects at strike prices of £52.29/MWh (in 2012 prices). That is 40% of the total 3.7GW winners. This followed the UK’s move last Tuesday to remove planning hurdles for onshore wind projects, in amendments to the UK Energy Bill. Local officials can now make planning decisions about wind farms with reference to the prevailing view of the community, not just objectors.
The failure of offshore wind in the CfD tender may, therefore, be good for the onshore wind industry. It shows that developers are confident they can build wind farms on land cheaply if they have the right support. Offshore wind will remain important in the UK’s future energy mix, but the support for onshore wind and solar projects shows that all will have important roles to play.
There must now be further changes to unleash onshore wind’s potential. We remain concerned about how local officials will prove community support for onshore wind farms, which is difficult to quantify, and also that decisions on wind projects will remain too reliant on the whims of individual planners.
This CfD tender shows that wind developers are keen to take opportunities to build profitable projects in the UK. But more changes are needed, both in the onshore and offshore sectors, to fix historic problems with the system.