he UK’s ambition to be a leader in offshore wind energy was dealt a major blow on Friday as a key auction delivered just a third of the green energy capacity it had last year.
The auction, which allots contracts to renewable energy developers, saw no offshore wind builders bid for contracts, putting at risk the country’s ambition to triple the size of its offshore wind portfolio by the end of the decade.
But why did no companies bid for an offshore wind contract this year, how do these contracts work and what needs to be done to avoid the same happening next year?
– What is a contract for difference?
For a long time, anyone wanting to build wind farms, solar farms or other renewable energy plants would need subsidies to make it worthwhile. Otherwise they would not be able to compete with coal or gas power plants, which at the time were much cheaper.
But in the middle of the 2010s the Government changed the way it supported renewable energy projects.
Now, instead of giving companies grants, the companies sign a contract which guarantees them a fixed price for every unit of electricity they produced. These are called contracts for difference (CfD).
They give companies certainty that even if wholesale electricity prices plummet, they will be protected.
But they also protect households should wholesale electricity prices soar. In the last couple of years, as gas prices soared, wind farms have been returning hundreds of millions of pounds to customers, helping to keep bills lower than they would otherwise have been.
Companies win contracts by saying they can provide electricity at a price per megawatt hour (MWh). The companies who promise to supply electricity at the cheapest price win the contracts.
– Why was there no new offshore wind in this year’s renewable’s auction?
Put simply, while households have seen their cost of living rise significantly in the last two years, the cost of doing business has also soared for many companies.
Vattenfall, a Swedish energy company hoping to build several new wind farms in UK waters, said costs have spiked by as much as 40%.
Meanwhile, the Government sets a maximum price companies are allowed to charge if they bid for a CfD contract.
This price was £155 per MWh for offshore wind in 2015 but has been steadily fallen to help push down household bills. In this year’s auction, the maximum price was £44 per MWh.
But that turned out to be too cheap for developers to stomach. At that price, companies simply could not make ends meet so they did not bid for any of the contracts.
– How big a blow to the UK’s ambitions is this?
It is not insignificant. The Government wants the UK to have 50 gigawatts of offshore wind capacity installed by 2030. Right now there is 14GW of capacity installed.
It takes years from getting a contract until wind turbines have been built and come online. So a lost year like 2023 is likely to prove a real setback even though there is no way to know how many GW of new wind turbines would be built if the terms were better.
The silver lining is that there will be a new auction next year. If the Government provides a more welcoming framework for companies, it is possible they will be able to bid for all the contracts they would otherwise have bid for this year, and all the ones they were going to bid next year.
If that happens, 2023 may prove to only have delayed some projects by a year.
– Don’t companies just want to charge more and won’t that increase my bills?
Yes. Companies want to be able to charge more.
But no, that will not increase your bills from where they are today.
It is unclear what maximum price the Government will need to allow companies to charge for them to bid for contracts again last year.
However the £44 per megawatt hour (MWh) cap is very low. For example, over the last year, electricity has cost around £129 per MWh on average. Since 2012, the average electricity price has been around £67 per MWh.
So even if companies are allowed to charge £10-15 more per MWh, they will still be providing cheaper electricity than where bills are now.
It would also be cheaper than Triton Knoll, which is the cheapest offshore wind farm now producing electricity on a CfD contract, at £74.75 per MWh.
In fact, by not allowing companies to charge a little more for wind, it is likely to keep bills higher than they otherwise would be.
– How does this year’s auction compare to past years?
This year’s auction is the first of the five auctions that have run since 2015 not to include any offshore wind.
But, like with past auctions, there are also other types of renewable energy contracts in this auction.
Taken together, these add up to 3.7 gigawatts (GW) of capacity. That is much lower than any of the last two auctions. In 2022, nearly 11GW of capacity was secured. In 2019, around 5.8GW was put on the table.
The 2017 auction secured 3.3GW of new capacity, while the 2015 auction secured 2.1GW of capacity.
The auctions used to run every two years but have recently become annual.