Offshore wind: government failure in next renewables auction could mean Britain misses chance to cut foreign LNG gas dependency by half

Failure to max out the amount of offshore wind secured at the next ‘Contracts for Difference’ auction could mean an extra 7 million homes’ worth of gas is required each year.

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By George Smeeton

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After the Government failed to secure new offshore wind farms in its flagship ‘Contracts for Difference’ scheme auction in September, new analysis from the Energy and Climate Intelligence Unit (ECIU) has found another failure in the next ‘Allocation Round’, which is due to start imminently, could leave the UK needing around 50% more foreign liquefied natural gas (LNG) imports.

Without new wind farms the UK may have to burn more than 80 terawatt-hours (TWh) extra gas in power stations each year, which as the North Sea continues its decline, is likely to come from imports [1]. The amount of gas is equivalent to around half (48%) of all gas currently imported via LNG tankers from places such as Qatar, or a quarter (26%) of gas currently imported to the UK via pipeline [2]. It is also equal to the gas required to heat over 7 million homes for a year.

There is estimated to be around 8 gigawatts (GW) of potential offshore wind farm capacity eligible for bidding into the sixth Allocation Round. If all bid in and were successful, this could increase the UK’s existing 14GW fleet by more than half. However, if planning permissions could be sped up, there is as much as 13GW of wind farms that could be built [3], which would almost double current capacity.

This amount of wind power could cut British homes’ dependency on foreign gas imported via LNG tankers by over three-quarters (77%) of current levels, or pipeline imports by just under half (43%) of current levels. The amount of gas saved is equivalent to heating over 12 million homes for a year.

Commenting on the analysis, Jess Ralston, Energy Analyst at the ECIU said: “Offshore wind farms stood in British waters can provide genuine energy independence for the UK, but the recent auction failure has left us ever more dependent on foreign gas. If the Government repeats this failure, the UK may be more reliant on foreign gas imports. New North Sea licences are a distraction with little new gas left in the basin and the price being set internationally anyway.

“If rumours of the Government setting a higher contract price are true, these renewables are likely to be comparable or slightly cheaper than the predicted wholesale power price at the end of the decade. That could be good news for bill payers, who may well see some returns if the gas crisis re-ignites or, as is likely, competition drives down future offshore wind prices. However, the Government needs to secure the jobs and supply chains now, with appropriate prices, otherwise those benefits may not flow.” [4]

In the last Allocation Round, the Government did not adequately account for the impacts of inflation in offshore wind supply chains, which the industry has said has increased costs by 20-40% [5], and the administrative strike price (a cap on prices) was set too low. This resulted in no offshore wind bids being received. 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 [6].

Previous analysis [7] has shown that this failure means that around 5GW offshore wind was not secured in Allocation Round 5, which could cost consumers £1bn in missed bill savings for each year of delays from the mid-2020s.

In mid-November, the parameters for Allocation Round 6 are expected to be released [8], with offshore wind developers and investors claiming that a substantial uplift to the administrative strike price set by Government to account for inflation and higher interest rates is required [9] to secure bids.

In addition, the industry claims that a suitably sized budget pot (which limits the overall capacity that can be secured) and changes to the eligible technologies that can bid into different sections of the CfD scheme will impact potential bids.

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, offshore wind is likely to remain cheaper or comparable to forecast wholesale prices, set by gas, of around £100/MWh for the middle of this decade. [10]

However, the offshore wind industry still faces uncertainty, especially with recent Government rollbacks on various net zero measures. For example, offshore wind company Vestas has said that if there is no greater Government support, demand may be muted, and there is “no need to build” a new UK factory that could support more than 1,000 jobs [11].

CfDs for existing wind farms paid back c.£600million in one year of the gas crisis [12]. However, future savings from Allocation Round 6 could be even greater if there is another gas crisis similar to today’s. Indeed, the potential savings from securing 8GW of offshore wind at Allocation Round 6 could be somewhere between £6-15 billion by 2035 and £10-30 billion by 2050, should a gas crisis re-occur once a decade [13], as considered by the OBR in its recent analysis of risks to the UK economy [14].

A single large offshore windfarm of 2.7GW would generate the same amount of electricity annually as could be produced by the annual gas output that would be affected by a moratorium on new North Sea gas production. [15] So, securing 8GW of offshore wind would be equivalent to triple the effect of new gas licences.

[1] ECIU analysis was based on the Government’s Renewable Energy Planning Database, which shows that 8GW of offshore wind projects have planning permission and are awaiting construction, but have no CfD allocation. Load factors of 63% for offshore wind and 50% for gas power stations were used, in line with Government data. Assuming that no new wind power is secured may mean that more gas imports are required.

[2] Gas statistics are taken from Government data, using 3-year averages of the UK’s annual gas demand, imports (not net imports) from pipelines and from LNG. This analysis compares impacts of offshore wind farms against current levels of gas imports, but note that gas imports are expected to be even higher in 2030 than today because UK gas production is falling faster than demand is falling e.g. see Getting off Gas (ECIU, 2023).

[3] Renewable UK figures, 2023, available on request.

[4] UK Prepares to Hike Wind Farm Prices as Developers Struggle (Bloomberg, 2023)

[5] Ørsted warns about rising costs of UK wind development (FT, 2023)

[6] Minister Ryan welcomes hugely positive provisional results of first offshore wind auction (Government of Ireland, 2023)

[7] Offshore wind: All at sea? (ECIU, August 2023)

[8] Indicative timetable for AR6 (HM Government, 2023)

[9] The struggles of the offshore wind industry (FT, 2023)

[10] GB Power Market Outlook to 2030 Q2 2023 (Cornwall Insight, 2023)

[11] Vestas says plans for UK wind turbine factory depend on demand (FT, 2023)

[12] Data for Q4’21 to Q3’22, Historical Dashboard (accessed Sep. 2023, LCCC)

[13] ECIU estimates using wholesale power prices predicted by Cornwall Insight, then another gas crisis like today’s every 10 years, as the Office for Budget Responsibility has modelled in their 2023 analysis. The modelling uses decade-long cycles: 1yr of rising wholesale prices (like 2021), 1yr of very high prices (like 2022), 1yr of high but falling prices (like 2023), and then 7yrs in which prices tail off but never reach pre-crisis levels (as is forecast for 2024-30). The analysis assumes that the wholesale power market operates as at present, with gas plants usually setting prices.

[14] Fiscal risks and sustainability (Office for Budget Responsibility, July 2023)

[15] North Sea moratorium equivalent to just one new offshore wind farm (ECIU, 2023)

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