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Britain’s net zero emissions target has faced significant challenges this summer.
Prime Minister Rishi Sunak committed to expanding oil and gas licensing, while developments in onshore wind fell below expectations. Additionally, Vattenfall, a major offshore wind developer, paused a large project in UK waters.
The latter issue is equally concerning because the government plans for offshore wind to replace gas-fired power plants as the foundation of the UK’s electricity system. The target is to reach 50 gigawatts of offshore wind capacity by 2030, but with just seven years remaining, there is still a shortfall of over 36GW. The Vattenfall project alone would have contributed 1.4GW, leaving little room for more setbacks.
Unfortunately, the outlook doesn’t appear to be improving. Offshore wind executives have low expectations for an important renewable energy contract auction, the results of which will be announced on Friday. Trade bodies representing the industry’s leading developers are calling for reforms in the way offshore wind is funded in the UK, and these calls are likely to intensify.
Costs for offshore wind have soared by 40% this year. Everything involved in building an offshore wind farm, from the turbines to the cabling, has been affected by substantial price increases.
The industry itself bears some responsibility. In recent years, there has been a race to deliver projects at increasingly lower prices, resulting in suppliers being squeezed. Now, the supply chain is not only passing on higher raw material and energy costs, but also trying to recover margins.
The warning signs were evident even before Russia’s invasion of Ukraine last year. Danish turbine maker Vestas highlighted the spiraling costs of raw materials and transport in 2021, which should have been a cause for concern across the industry.
Offshore wind companies are justified in their complaint that the prices offered by the UK government for the energy capacity they deliver have not kept up with rising costs.
Each year, offshore wind developers compete for government contracts that guarantee them a fixed price per unit of electricity produced. The government sets a maximum price for each auction, and companies must offer that price or less. If the market price is higher, they must pay the difference to the government, and vice versa if it is lower.
In this year’s bidding round, the maximum price was set at £44 per megawatt hour based on 2012 prices, which is closer to £60/MWh today. UK electricity prices are currently around £87/MWh, while a similar auction in Ireland averaged €86.05/MWh (£73.50/MWh). Companies are already lobbying for changes in next year’s UK auction.
Despite the challenging conditions, some developers are still proceeding with projects. For example, Iberdrola is building the 1.4GW East Anglia Three project off the Suffolk coast. However, trade bodies like RenewableUK warn that the UK’s 50GW target may be at risk.
One potential solution is for the government to align prices more closely with the cost of materials, such as steel. Ireland is already using a similar indexation. Longer-term tax incentives, such as capital allowances, could also be considered.
Consultants suggest that the government could assist developers by providing advance information on how maximum bid prices will be determined. Currently, offshore wind companies only receive this information a few months before auctions open, despite projects taking years to develop.
In exchange for higher prices, ministers could require a greater proportion of components to be sourced from UK suppliers. Critics argue that most UK taxpayer subsidies for renewables benefit foreign companies, so this would ensure that UK workers also benefit. However, it is likely that component costs would increase as a result.
Developers could also explore additional funding sources, such as contracts with large corporations to sell the electricity produced. Alternatively, they could take a risk and bet on selling some of their output at higher prices on the open market.
While offshore wind companies share some responsibility for the industry’s current predicament, if the government wants to meet its 50GW target, it must accept that offshore wind energy prices cannot continue to decrease. The first developers to receive government contracts in 2015 were guaranteed prices above £114/MWh. Ministers will need to find a middle ground with the industry if they want to see more turbines spinning in the North Sea.
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