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

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.