Out-Law News 3 min. read
08 Sep 2023, 2:13 pm
The UK government must give the offshore wind industry “immediate assurance” over the price support they will be able to obtain in future for supplying power to Britain’s electricity grid or risk losing out on investment to other countries, an expert has said.
Energy projects specialist Ian McCarlie of Pinsent Masons was commenting after no offshore wind developers were awarded contracts in the latest round of the government’s renewables contract for difference (CfD) auction.
On Friday, the government announced that 95 renewable energy projects, projected to add 3.7GW of capacity to Britain’s electricity grid, had been successful in the fifth round of allocations under its renewables CfD scheme. Solar, onshore wind, tidal, and – for the first time – geothermal energy projects were among those successful in the auction. The UK government said that, together, the projects would be able to power two million UK homes. In last year’s auction, 93 projects accounting for 10.8GW of generation capacity were successful.
However, after the maximum price that offshore wind developers could bid in the auction was cut – from £46 per megawatt hour (MWh) for last year’s auction, to £44 per MWh for this year – it appears that no offshore wind developer made a bid. The industry had previously warned that the maximum price would need to increase to account for rising costs.
The Offshore Wind Industry Council described the auction results as “a missed opportunity for UK’s economic growth” and said the “parameters” for next year’s CfD renewables auction will need to change, while RenewablesUK said “a package of reforms to the CfD, support for supply chains and fiscal measures” are needed “to attract clean energy investment into the UK in the face of global competition”. The UK government said the auction result is consistent with similar results in countries such as Germany and Spain in the face of rising inflation and that it remains committed to securing 50GW of offshore wind capacity and 5GW of floating offshore wind by 2030.
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Offshore wind developers are global players, in a global industry, and governments are in a competitive environment to ensure investment and deliver the offshore wind targets being pledged
McCarlie said: “The CfD allocation round five announcement is a major setback for the offshore wind industry and will knock the confidence of those businesses making early investments into the supply chain in expectation of further growth in this sector as part of the energy transition journey. This will likely mean a re-think from government as the industry will need immediate assurance that the CfD mechanism for offshore wind will be reassessed for economic competitiveness. Global players are no doubt taking note of this market shock.”
CfD auctions are the government’s primary method of supporting renewable energy. They are designed to support low-carbon electricity generation by providing direct protection from volatile wholesale prices for developers working on projects that have high upfront costs and long lifetimes. The auctions also protect consumers from paying increased support costs when electricity prices are high.
In an effort to scale-up renewables production, the government has moved from holding renewable CfD auctions every two years to staging them annually – with allocation round five the first since the change.
The results of the UK’s auction could have positive implications elsewhere in the global offshore wind market, with developers turning their attention to emerging markets such as Australia. Energy sector expert Melanie Grimmitt of Pinsent Masons said: “As governments around the world continue to announce ambitious plans to drive forward their own offshore wind programmes, they will no doubt take note of what has happened in the UK. Offshore wind developers are global players, in a global industry, and governments are in a competitive environment to ensure investment and deliver the offshore wind targets being pledged.”
Offshore wind will bounce back, given the strong policy support it has from both the Conservative and Labour parties
Renewable energy expert Gareth Phillips, also of Pinsent Masons, said there are positives to be taken from the results, particularly in relation to solar photovoltaic technology. Phillips said: “In total, 56 solar projects have secured a contract, equating to nearly 2GW of capacity, which is a good step forward in the context of the 70GW target set out in the British energy security strategy, and reflects the fact that solar remains the cheapest form of renewable energy generation. Offshore wind will bounce back, given the strong policy support it has from both the Conservative and Labour parties. In the meantime, solar continues to do well.”
Renewables project expert Ronan Lambe of Pinsent Masons said: “The number of onshore wind and solar projects receiving support in allocation round five could be seen as a vote of confidence for the government in re-opening pot one to these technologies – a change which the government made in the previous allocation round. It is telling, however, that a number of these projects were previously seeking alternative routes to market but have opted instead for a CfD at a lower value than they could otherwise have achieved.”
“For certain projects, this is likely to be at least partly due to the uncertainty in the market caused by the government’s review of electricity market arrangements (REMA) and the potential which certain of the structural changes to the electricity market contemplated by REMA have to reduce long term revenues from new electricity generation, and a view that having a CfD may provide some protection from such uncertainty,” he said.
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