Offshore wind: Treasury ‘caution’ set to backfire on bill payers, increase gas imports by 2.5x

Following the Government’s recent announcement of the budget available for new offshore wind farms, analysis from the Energy and Climate Intelligence Unit (ECIU) finds that the Treasury’s unrealistic power price predictions could stifle new projects leading to the UK being much more dependent on foreign gas imports and bill payers facing further price spikes.

The so-called ‘budget’ for the Government’s flagship renewables scheme, Contracts for Difference (CfD), is calculated based on Treasury’s wholesale electricity price predictions, but these are around half what industry experts Cornwall Insight currently expect [1]:

CfDs work by setting a fixed price for power purchased from renewable generators, decided by an auction. If the wholesale price is below the fixed ‘strike price’, consumer bills make up the difference, but if the wholesale price is higher, consumers bills are effectively subsidised by renewables. So Treasury’s ‘budget’ of £1.025bn, with £800m [2] specifically for offshore wind, for the next renewables auction may never actually be added to energy bills.

This repayment occurred during the past two years of the gas crisis with CfD offshore wind farms subsidising the taxpayer cost of the Government’s energy price guarantee by £660 million in the 18 months from October 2021 [3]. If the wholesale price drops, households will have cheaper bills anyway. In normal times, when government is not paying a portion of bills, if the wholesale price is high, CfDs will reduce bills, effectively acting as a bill stabiliser.

The constraints of the current Treasury predictions mean the UK may only secure 3-5 gigawatts (GW) of offshore wind capacity in this year’s auction, according to industry experts [4], out of a possible 10.3GW of ‘shovel-ready’ offshore wind farms. Maximising procurement and securing the full 10.3GW could reduce the UK’s current gas imports by around a quarter if the projects come online from 2027. Instead, with the current auction parameters, the UK will only reduce gas imports by around10% [5].

Commenting on the analysis, Jess Ralston, Energy Analyst at the ECIU said: “Treasury’s caution will likely backfire on bill payers, leaving households at the mercy of greater price volatility. By stifling British offshore wind farms at this next auction, the UK could end up importing two and a half times more foreign gas. It’s a backwards step for UK energy security.

“This comes off the back of Government fumbling the last auction leading to no new offshore wind farms being agreed. While the economy stagnated last year, the UK’s net zero economy grew 9%, but with the lack of ambition and competition from the US and EU for investment, Treasury can’t take that for granted.

“The Government may want to re-think these Treasury rules if it is serious about backing British renewables. As the North Sea continues its inevitable decline, the simple equation is unless we build more renewables, insulate homes and install more heat pumps we will become less energy independent and more dependent on foreign gas imports."

Although the offshore wind capacity likely to be secured at the next auction could save the UK burning around 30,000 – 55,000GWh of gas in power stations, the UK will likely miss out on a further 80,000-55,000GWh of potential gas savings. This is because maximising the offshore wind secured at auction, to 10.3GW, could have saved 110,000GWh of gas a year.

The gas saved under the maximum pipeline scenario is the equivalent to that needed to heat more than 9 million homes for a year, or contained within around 130 LNG tankers. The offshore wind likely to be secured will displace less than half this amount; the equivalent gas to heat around 3-4.5 million homes for a year, or within around 40-60 LNG tankers [6].

Offshore wind projects that are not able to get a CfD under the latest auction round, Allocation Round 6 (AR6), may secure a contract in a subsequent allocation round, but every year of delay undermines the UK’s energy independence because, as the North Sea continues its decline, this gas has to be imported from abroad.

Industry has previously spoken out against Treasury rules that set the ‘budget’ for CfD pots [7] and the outdated assumptions on future power prices that artificially inflate the theoretical cost to consumers and therefore limit the capacity that can be secured.

Although numerous changes were announced to the future of the CfDs scheme in the Government’s recent Review of Electricity Market Arrangements documents [8], it does not appear that changing the reference prices used to calculate the budget pot is a priority. This means that several more artificially limited auction rounds may take place in the coming years.

Predicting wholesale power prices is notoriously difficult, but some industry estimates suggest that prices towards the end of the decade will be similar to offshore wind power prices [9], so consumers may not pay comparatively little or even nothing towards the new renewables. However, gas prices, which set the price for electricity because of the UK’s marginal pricing system, are historically volatile and the Office for Budget Responsibility recently modelled a scenario [10] in which conflict in the Middle East causes gas prices to rise by 75% in 2025, which would cause power prices to rise again and could increase repayments to consumers.

In the last Allocation Round, the Government did not adequately account for the impacts of inflation, which the industry said had increased costs by 20-40%, 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 [11].

Previous analysis [12] 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.

A single large offshore windfarm of 2.7GW would generate the same amount of electricity annually as could be produced by gas from new North Sea fields. [13] So, securing 10GW of offshore wind would be equivalent to almost four times the effect of new gas licences.

ENDS

Notes to editors

[1] AR6 parameters (HM Government, 2024) and GB Power Market Outlook to 2030 Q2 2023 (Cornwall Insight, 2023). Note: Treasury reference prices in 2012 prices have been converted to 2024 prices using the Bank of England inflation calculator.

[2] CfD AR6: Statutory Notices (HM Government, 2024)

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

[4] Clean energy budget increase is welcome, but could go further to maximise private investment (Renewable UK, 2024)

[5] 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. Gas statistics are taken from Government data, using 3-year averages of the UK’s annual gas demand, imports from pipelines and from LNG. Net imports are calculated by subtracting total exports from total imports. 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).

[6] Ofgem’s typical domestic consumption values (TDCV) of 11,500kWh per year used for estimates of average gas consumption for heating, and typical LNG capacity of 870GWh.

[7] UK risks second troubled offshore wind auction round, RWE warns (Financial Times, 2024)

[8] REMA: Second consultation (HM Government, 2024)

[9] Power Market Outlook to 2030 (Cornwall Insight, 2023)

[10] Fiscal and economic outlook (Office for Budget Responsibility, 2024)

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

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

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

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