Billpayers could miss out on £1bn a year in savings due to wind auction error

If media reports are true that no new offshore wind farms have been agreed, households and industry face higher bills.

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By George Smeeton

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The Government’s failure to recognise the impacts of inflation in supply chains risks costing billpayers £1bn a year in savings from offshore wind, if media reports are true that the latest renewables auction has failed to attract projects that could be built in the next few years, according to new analysis by the Energy and Climate Intelligence Unit. [1]

Offshore wind costs reached a record low strike price of around £50 per megawatt-hour (in current prices) in the Contracts for Difference (CfD) Allocation Round 4 (AR4) auction held in 2022. Despite subsequent project cost inflation [2] due to the post-pandemic economic recovery, the gas crisis, and rising interest rates, offshore wind remains around a third cheaper than forecast wholesale prices set by gas of around £100/MWh for the middle of this decade. [3]

However, the Administrative Strike Price (ASP) that caps CfD auction bids was not adjusted to reflect this inflation for the AR5 CfD auction held this year. By contrast, the Irish Government allowed for supply chain inflation in its recent auction, which has successfully secured 3GW of offshore wind capacity at competitive prices. [4]

As a result, out of the UK’s 5GW of ‘shovel ready’ offshore wind projects that could be delivered in the mid-2020s, [5] it appears that none have bid into AR5 and all could now face delays. Had these projects been able to secure contracts, even with higher strike prices they would have paid back £1bn per year in the mid-2020s, a saving that could now be delayed.

Commenting on the results, Jess Ralston, Energy Analyst at ECIU, said:

The key point here is that even with inflation, offshore wind is still about a third cheaper than gas power stations with the price of gas set to remain higher than before the crisis.

The more renewables, the less gas you have to buy. By failing to back offshore wind, the Government has added around £1 billion a year to energy bills in coming years. Combine this with the fudge on lifting the onshore wind ban, and the Government is going backwards on easing the energy bill crisis.

New oil and gas licences don’t bring down bills. Offshore wind farms do. Will the Government now try to rerun the auction at a reasonable price?”

A single large offshore windfarm of 2.7GW would generate the same amount of electricity annually as could be produced by the gas output that would be affected by a moratorium on new North Sea gas production. [6] So, securing 5GW of offshore wind would be equivalent to almost double the effect of new gas licences.

With 8GW of offshore wind projects having planning permissions but not yet a CfD, [7] there could have been higher potential. Had AR5 secured 7GW of offshore wind as was the case in AR4, then savings would have been around £1.5bn per year. [8]

Customers are also missing out on further savings from onshore wind and solar, which despite similar supply chain inflation issues are also cheaper than forecast wholesale prices that are largely set by gas power plants. Their progress has been hindered by the ban on onshore wind in England, and the exclusion of both technologies from most previous CfD auctions. Recent changes to planning rules do better reflect public opinion, with three-quarters supporting onshore wind, [9] but concerns remain about ongoing hurdles to onshore wind [10] and restrictions on solar. [11]

The prospects could be poor for onshore wind and solar in AR5, whose supply chain inflation was not reflected in their ASPs. If AR5 replicated the 0.9GW of onshore wind and 2.2GW of solar seen in AR4, even with 20–40% added to strike prices, this would have saved customers £150million per year in the mid-2020s. With large capacities of both technologies stuck in the planning process, had that process been improved and had AR5 auction parameters been better designed, the auction could have secured much large capacities, e.g. 5GW each would have taken the savings to £500million a year in the mid-2020s. [12]

CfDs for existing wind farms paid back c.£600million in one year of the gas crisis. [13]

Notes to editors

  1. ECIU analysis was based on the following: Reported project cost rises of 20–40% were applied to AR4 strike prices of c.£50/MWh (2023 prices), to give £60–70/MWh (2023 prices), which is higher than the administrative strike price (ASP) for AR5 of 18% above the AR4 strike price, i.e. c.£59/MWh (2023 prices). Generation annual output is based on load factor of 63.3% as per Allocation Round 5: Allocation Framework, 2023 (DESNZ, March 2023).
  2. Ørsted warns about rising costs of UK wind development (FT, June 2023)
  3. GB Power Market Outlook to 2030 Q2 2023 (Cornwall Insight, July 2023)
  4. Minister Ryan welcomes hugely positive provisional results of first offshore wind auction (Government of Ireland, May 2023)
  5. Briefing note (Renewable UK, August 2023)
  6. North Sea moratorium equivalent to just one new offshore wind farm (ECIU, June 2023)
  7. Renewable Energy Planning Database (REPD) (DESNZ, July 2023)
  8. Offshore wind: All at sea? (ECIU, August 2023)
  9. Energy Bill: poll shows public ‘proud’ to vote for MPs backing onshore wind (ECIU, September 2023)
  10. Changes to de facto ban on onshore wind farms in England not enough, say critics (FT, September 2023)
  11. Blocking new solar farms could cost bill payers around £5bn a year (ECIU, September 2023)
  12. ECIU analysis of onshore wind and solar was based on the following: similar project cost rises as for offshore wind; and load factors of 42.7% and 11.5%, respectively. Illustrative capacities of 5GW were considered reasonable on the basis that UK has in its project pipeline, at various stages of the planning process and without CfDs, 15GW of onshore wind and 19GW of solar.
  13. Data for Q4’21 to Q3’22, Historical Dashboard (accessed Sep. 2023, LCCC)

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