Offshore wind auction expected to be major letdown for government’s green agenda
The latest auction round for offshore wind is expected to be disappointing for the energy sector, with potentially no bids for major wind farms.
CityAM understands from industry sources that the outcome will be highly disappointing for the government and renewables sector, when results are announced tomorrow by ministers.
It follows repeated warnings from developers that the government has not provided sufficient support to the latest allocation round for offshore projects.
These concerns were first reported by CityAM earlier this year.
The outcome would be a blow to the government’s energy security ambitions, with Downing Street targeting a ramp up from 14GW to 50GW of offshore wind generation by the end of the decade – a move considered essential for the UK’s net zero goals over the next three decades.
Soaring inflation has eaten into the margins of renewable developers, worsening the UK’s investment climate, alongside levies on renewable generators.
This has seen Vattenfall recently pull out of a major project off the Norfolk coast, while also ruling itself out of the current bidding round alongside rival clean energy player SSE.
Offshore wind developers bid for projects via allocation rounds, where they seek to offer the lowest generation costs in exchange for guaranteed income, known as the ‘strike price’.
This means customers pay a fixed rate for the electricity they generate, while generators gain a floor in revenues to prevent losses and a ceiling to limit bumper revenues.
When wholesale prices are lower, customers effectively pay subsidies to top up the difference, but when wholesale prices are higher, developers back pay the difference.
The arrangement is known as the ‘contracts for difference’ scheme.
Generation costs for renewable projects have plummeted since the first allocation round in 2015, dropping from £155 per megawatt hour to £37 per megawatt hour three years ago.
The fourth allocation round delivered nearly 11GW of new clean energy to be added to the grid by 2029, with 93 projects winning contracts.
However rising costs have led to industry fears of higher prices in the upcoming auction round and fewer bids in the current fifth allocation round.
The government raised the overall budget from £205m to £227m during its unofficial energy security week last month, but this is not expected to make a difference to the auction’s outcome.
This is despite at least five offshore wind projects with 5GW of combined capacity expected to be eligible for this year’s auction – enough to power more than 5m homes.
CityAM has approached the government for comment.