Offshore wind: Treasury red tape could cost UK bill payers £1.5 billion per year

New Energy and Climate Intelligence Unit (ECIU) analysis [1] has found the latest Government auction for new offshore wind farms, due to complete in September, could see few projects making it through Treasury rules leaving UK bill payers around £1.5 billion worse off per year.

In spite of inflation pushing up the costs of offshore wind slightly, new farms are set to produce electricity much cheaper than the regular wholesale electricity price, which is largely set by gas power stations. The cost of the gas is predicted to stay two to three times higher than pre-crisis for the foreseeable future [2]. Even in a scenario where offshore wind costs increase to £60 per megawatt hour (MWh) this will still be much less than the wholesale cost of electricity which is set to stay around £90-100/MWh.

With the Government’s Contracts for Difference (CfDs) scheme, these wind farms would be contracted at a lower price than the wholesale price creating a saving for bill payers.

Treasury rules that don’t take account of predictions that the gas price will stay high and that put an arbitrary limit on the number of farms that can be contracted, are set to constrain the number of wind farms getting through the auction and so keep bills higher. The Government recently increased the ‘budget’ for the auction from £170million to £190million, but the analysis finds that this is likely to make little difference to the outcome of the auction [3] and ignores the fact that renewables are predicted to save money, not add cost to bills.

Jess Ralston, Energy Analyst at the ECIU said: “Government seems to be focussed on North Sea gas licences and tax breaks for oil companies that won’t bring down bills while tying up offshore wind farms that generate electricity cheaper than gas in red tape. What is going on?

“Even with inflation pushing costs up for offshore wind, it will still generate electricity much cheaper than gas power stations. Stifling wind farms pushes up bills. Treasury’s rules seem to be actively working against bringing them down.”

Britain’s offshore wind fleet is second largest in the world, after China, with a current capacity of 13.9 gigawatts [4]. This has largely been achieved through the Government’s Contracts for Difference (CfDs) scheme [5], a system of auctions for future projects. These auctions have boosted the wind industry, incentivising renewables companies with high upfront funds by offering a guaranteed price for energy generated, called a strike price [6].

But inflexible rules meant that the previous auction round (AR4) didn’t max out its budget [7], with the analysis finding that 1GW of wind power missed out on, and with it, savings of £225 million a year. And the current auction (AR5) [8] could secure as little as around 2GW of offshore wind, ECIU analysis finds, leading to missed savings of over £1.5 billion per year from cheaper renewable energy compared to around 7GW that could have been secured.

It could also represent a significant setback as the UK strives to achieve its target of 50GW of offshore wind by 2030 [9]. To put that number in perspective, at the height of winter, electricity consumption peaks at around 48GW [10], so 50GW could make the UK a net exporter, an aim set for 2045, while providing greater energy security.

As well as Treasury red tape, there are supply chain constraints pushing up the cost of building new turbines. Coupled with globally high inflation, CfD maximum strike prices – agreed before the auction – could have been altered to reflect these changes to guarantee sufficient bidders in the latest round.

After calls from industry, the Government appeared to recognise that the total budget set for AR5 may not yield the desired generation capacity due to high global costs and on 3^rd August, announced it would increase the budget from £170million to around £190million. The auction results are expected in early September.

Every gigawatt of wind power not only means cheaper electricity and savings on bills, but reduced reliance on fossil fuels. Previous analysis has found that just 2.7GW of wind power, the same capacity as one large windfarm, is enough to replace the new North Sea gas licences affected by a moratorium on drilling [11].

The next round of the CfD scheme, in 2024, could adopt greater flexibility and reflect market changes to enable the industry to grow at a rate that would keep pace with Britain’s net zero commitments. Every missed gigawatt of power generated by wind, means millions or billions of pounds in lost savings for bill payers.

ENDS

Notes to editors:

1. The report, Offshore wind: All at sea?, is available here: https://eciu.net/analysis/reports/2023/offshore-wind-all-at-sea
2. Cornwall Insight: Predictions and Insights into the Default Tariff Cap
3. Business Green: Government provides £22m boost to CfD clean energy auction pot
4. HM Government: Offshore wind
5. HM Government: Contracts for Difference
6. HM Government: Methodology for Auction Round 5
7. HM Government: Allocation Round 4 results
8. HM Government: Allocation Round 5
9. HM Government: Offshore wind net zero investment roadmap
10. HM Government: Digest of UK Energy Statistics 2023
11. ECIU: North Sea moratorium equivalent to just one new offshore wind farm

For more information or for interview requests:

George Smeeton, Head of Communications, ECIU, Tel: 07894 571 153, email: george.smeeton@eciu.net