Unveiling the Downfall: Britain’s Offshore Wind Auction Plagued by Failure

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Anyone who has visited Britain can vouch for its breezy weather. The gusts off the Atlantic Ocean and North Sea, and shallow coastal waters, means it has the greatest wind energy potential in Europe. So far, it has capitalised well on that advantage. The UK is a genuine world leader in wind: a third of its electricity came from the renewable energy source in the first quarter of 2023, and it is second only to China for its offshore wind energy capacity globally. Britain’s gale-force winds will be vital to meet its 2050 net zero target. This makes its failure last week to attract any bids from offshore wind developers in its annual renewable energy auction both worrying and embarrassing.

Last year the government committed to raise its offshore wind capacity to 50 gigawatts by 2030. After receiving zero offshore wind bids at its fifth auction — which will add about 3.7GW in other renewable energy capacity — the UK is about 36GW short of its goal with seven years to go. Onshore wind projects are, meanwhile, stymied by planning rules despite last week’s partial easing of a de facto ban. If Britain cannot harness its abundance of wind effectively, it will face an uphill battle to meet its emissions targets.

Britain has allocated low-carbon electricity capacity via its contracts for difference scheme since 2014. The government sets a maximum guaranteed price, and firms bid at auctions at a price they can produce at. Under CFD schemes, when the market electricity price falls below the agreed contract price, the government pays the difference to the producer. This has been an effective mechanism. It has given developers of renewables, who face high upfront capital costs, clarity over their future revenue streams.

But the latest auction failed primarily because the government did not promise a high enough maximum unit price for electricity. With recent high inflation, developers’ costs, including for turbines, cabling and wages, have all risen sharply. Higher interest rates make capital-intensive projects less attractive too. Yet the maximum £44 per MWh in 2012 prices offered by the government in last week’s auction — little changed on the previous auction — is considerably below wholesale prices in today’s terms. Vattenfall, a Swedish firm, had recently paused work on a 1.4GW site due to high costs: this should have been a warning sign.

The government must of course balance the need to develop renewable energy with costs for bill payers and taxpayers. This may explain why it tried to lowball the maximum price. But with electricity generated from offshore wind set to remain notably cheaper than gas for the foreseeable future, the failed auction in effect locks households and businesses into the more expensive and volatile fossil fuel for longer. RenewableUK, a trade body, said the lost wind farms eligible for the auction could have saved consumers £2bn a year.

The industry is also partly to blame. Many developers have squeezed suppliers to deliver projects at a low price, but now companies in the supply chain are trying to recover margins alongside high raw material costs.

But ultimately, the government needs to learn from this failure. Its processes for setting price caps ought to be reviewed. It should be more flexible and incorporate significant shifts in costs and interest rates into its offer. Providing information in advance on how prices will be set will help developers plan ahead too. It should also consider accelerating its future wind auctions.

Last week’s failure puts the UK’s net zero journey at risk and sends a bad signal to investors, who may now look for projects elsewhere. Tempestuous weather is indeed a mixed blessing. But when it comes to energy security and cutting emissions, wind is a strength Britain must lean into.