The government’s renewable energy policies have slashed costs and turbo-charged offshore wind capacity in the last decade, but Sophie Metcalfe says this year’s auction results show the sector’s future is not guaranteed
Offshore wind has been held up as a flagship net zero policy success, with government price support unlocking low-cost capital, accelerating investment and encouraging rapid innovation. Over the last decade this has led to an installed capacity boom and seen prices fall lower than anyone’s wildest dreams. But the dream is – for now, at least – over, after a failed auction saw no new projects forthcoming. The pressure is on the government to show it understands what went wrong, and then to act to prevent further damage to the industry.
Offshore wind was a big success story for the coalition government
The coalition government rightly gets credit for leading offshore wind’s success with the 2014 introduction of a new Contracts for Difference (CfD) price support mechanism. The CfD saw renewable project developers compete in sealed-bid auctions to win 15-year contracts to sell electricity at a guaranteed inflation-adjusted “strike price”. If the strike price is higher than generators can get through the wholesale energy market, a government-owned company funds the difference through a levy on energy suppliers, ultimately paid for by consumers. If the strike price is lower than the wholesale market (as it is currently due to high gas prices), generators pay the difference back to the government, which passes it on to consumers via suppliers. This has been a win-win policy: energy generators get a guaranteed future income to develop their projects, and consumers get low-cost, renewable energy.
Offshore wind emerged as the big success story of these auctions. 7GW of the 11GW of contracts awarded in 2022 went to offshore wind, at strike prices set at £37/MWh, less than a third of the price agreed at the first CfD auction in 2015.
The government failed to heed the warnings signs from the offshore wind industry
So what has gone wrong? Despite lot of successful bids for onshore wind and solar projects – good news for these sectors – this year’s auction has been a disaster for offshore wind. There had been warning signs from the industry – including 2022 CfD-recipient Vattenfall suspending work on its 1.4GW Norfolk Boreas offshore project in July 2023 – but the government set the maximum strike price for offshore wind too low, meaning no one was prepared to bid.
The solar and onshore wind projects are smaller than a typical new offshore wind project, so the additional electricity capacity funded this year is just a third of last year’s total, and future capacity growth in these technologies relies on them overcoming planning restrictions. 7 he Economist, ‘Britain is losing its way in cutting carbon’, The Economist, 5th September 2023, https://www.economist.com/britain/2023/09/05/britain-is-losing-its-way-in-cutting-carbon The government’s renewables targets for the end of the decade, which assume more than tripling current offshore wind capacity, look a long way off.
The government needs an industrial strategy for offshore wind
The government cannot say it wasn't warned that it was setting the price too low, and as a first step it needs to show that it understands the cost pressures industry is facing to avoid further failed auctions.
Nor do risings costs seem likely to fall, at least in the short term. Russia’s war in Ukraine and global supply chain issues, made worse by Brexit, have led to high inflation on core raw materials for offshore wind projects like steel. So the government will need to price these costs into future auctions, bringing savings compared to high oil and gas prices. But beyond these immediate pressures, the government needs an industrial strategy to build more reliable supply chains.
While its hands are relatively tied by World Trade Organization rules requiring that imports compete on an equal footing with domestic products (the subject of a dispute as recently as last year), 8 Pickard, J., ’EU confronts UK on wind turbines in first WTO dispute since Brexit‘, Financial Times, 28 March 2022, EU confronts UK on wind turbines in first WTO dispute since Brexit | Financial Times (ft.com) its March 2023 energy security plan identified some initial steps to boost supply chains, including providing grants for domestic manufacturing facilities. These, however, are still far removed from a full industrial strategy.
The government needs to speed up planning decisions and improve transmission infrastructure
But just unblocking the auctions is not enough. The government’s Offshore Wind Champion, Tim Pick, has warned that the time taken to gain planning consent for projects has ballooned way beyond the statutory 18 months, due to the rising number, size and complexity of applications (particularly due to overlaps with Marine Protected Areas). The government’s April 2022 British Energy Security Strategy outlined a welcome package of measures to improve planning processes for offshore wind but, as Pick recommends, these should be implemented as quickly as possible across England, Scotland and Wales to prevent further delays in the funded wind pipeline.
Beyond increasing capacity, the government also needs to ensure the infrastructure is there to use it. Tim Winser, the Electricity Networks Commissioner, last month published a report on how the government can reduce timelines for delivering the transmission networks the UK needs to connect new renewable energy projects to consumers – and set out a roadmap for reducing the timescale for building the networks the UK needs from 14 years to seven. The government must now act urgently on Winser’s recommendations.
The success of past energy policy in accelerating installed offshore wind capacity should be a cause for optimism. But the government needs to rebuild its shattered credibility, on both price-setting and long-term planning and infrastructure reform, if it is to get anywhere close to its target to install 50GW of wind energy by 2030.