UK Renewables Auction: Have the Turbines Stopped Turning?

A short pause is not a disaster

Key Points:

·         UK renewables auction concludes with no bids from offshore wind developers.

·         Project costs exceed those of solar and onshore wind; reversing earlier trends.

·         Locking-in current high costs would be imprudent.

·        Global offshore wind growth persists; tech progresses, costs decline.

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The results of the latest UK renewables energy auction (CfD Auction Round 5 – AR5) were released on 8 September 2023. The auction ended with no offshore wind developers submitting a bid. Ed Miliband labels this an "energy security disaster," while Greenpeace dubs it the worst "clean energy policy blunder in eight years." But is the outcry warranted?

First, AR5 results (prices are in 2012 prices):

• 1.9 GW of new solar (13% decline from AR4) at £47/MWh (2% increase from AR4)

• 1.5 GW of new onshore wind (67% increase) at £53/MWh (25% increase)

• 0.2 GW of remote island wind (63% decline) at £53/MWh (14% increase)

• Tidal stream and geothermal gain contracts for 52 MW and 12 MW, respectively

• No new offshore wind.

Figure 1: Comparison of AR4 and AR5 auction results.
Source: Department of Energy Security and Net Zero¹
Note: AR4 offshore wind capacity adjusted down for the cancellation of 1.4 GW Norfolk Boreas project

Solar retains its crown as the cheapest form of green energy, with a mere 2% spike in its strike price. The drop in solar module prices by over 25% this year—from 30 cents to 22 cents per watt capacity as of August 2023—has been pivotal.² High module inventories also hint at continued downward pricing trends at least in the near term.³ Dropping module prices have helped to offset the impact of rising cost of capital.

Figure 2: Monthly European Spot Prices for Solar Markets

As solar projects decline, new offshore wind projects in Europe and North America are becoming pricier. Reports indicate that UK’s new offshore wind project costs has risen by more than 40% this year,⁴ – though it is unclear if this encompasses just CAPEX and OPEX or also financing costs. Similarly, BloombergNEF analysis shows that the levelized cost of US offshore wind has risen 57% from $77.30/MWh (nominal) in 2021 to $121.40/MWh⁵, excluding bonus tax credits from the Inflation Reduction Act. The elevated costs might continue in the short term as leading European turbine manufacturers all mention improved pricing going forward.⁶

Figure 3: BloombergNEF’s estimate of US offshore wind LCOE

Amid surging costs, the financial feasibility of new offshore wind projects at AR5’s £44/MWh cap is unattainable, prompting industry appeals for a revised auction price cap and larger budget.⁷ Without this cap, my estimates place the strike price between £57-59/MWh (2012 prices).⁸ Over the 15-year CfD contract spanning 2027 to 2041, inflation indexation to the strike price would raise this to around £100/MWh on average.⁹ So, is this a good deal for UK consumers?

Opinions diverge. The Energy & Climate Intelligence Unit suggests that the lack of offshore bids this round could add nearly £1 billion annually to energy bills.¹⁰ EnergyUK’s pre-auction position paper predicted up to £530 million more in energy bills by 2030.¹¹

Yet, I question the wisdom of locking in at a £100/MWh price. Historically, wholesale power price surpassing this rate is rare before the war in Ukraine. Current high prices are driven mainly by high gas prices due to the inability of the global LNG supply chain to ramp up export capacity in response to reduced Russian supply to Europe. This is set to change with LNG export capacity expected to surge by 80% by 2030 . ¹²This is further supported by the record orderbook for new LNG carriers, expanding the global fleet by about 50% ,¹³ raising a prospect of an LNG glut towards the end of the decade.

Is the absence of offshore wind bids at AR5 truly an energy policy disaster? In my view, it wouldn't have been wise to lock in the high price for 15 years (the duration of the CfD contract), especially when the current elevated offshore wind costs might be temporary. Waiting a year before making policy changes could be beneficial. This would give time for supply chain issues to sort out, commodity prices in Europe to stabilize, and uncertainties regarding the future path of monetary policy impacting capital costs to dissipate. To be clear, I don't anticipate the strike price for offshore wind to revert to AR4’s £37.4/MWh (2012 prices) soon so the price cap on offshore wind should be lifted. If the current cost challenges persist into next year, and there's a need to ensure a robust supply chain, then a policy shift would be more justifiable.

Before sounding the alarm on the future of offshore wind, it's crucial to note that its global momentum is far from waning. In 2022, the worldwide offshore wind capacity surged by 8.8 GW, elevating the total capacity to 64.3 GW. Asia was at the forefront, contributing 6.2 GW of this new capacity, predominantly from China, Taiwan, and Japan.¹⁴ Technology development is also accelerating. China marked a milestone by installing the world’s first 16-MW offshore wind turbine (MySE-16-260 model) off the coast of Fujian province.¹⁵ GE upped the game with the announcement in March that it is developing a 18 MW turbine based on its Haliade-X platform.¹⁶ Additionally, the costs for Chinese offshore turbine have also seen a substantial drop - from 7,000 yuan per kW in 2020 to around 3,000 yuan per kW based on recent tenders.¹⁷ This price drop could lead to further growth in offshore wind installations in the global south.

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1. And several other previous names over the past 5 years

2. SolarPower Europe (11 September 2023), “Record-low solar PV prices risk EU’s open strategic autonomy”, available at https://www.solarpowereurope.org/press-releases/record-low-solar-pv-prices-risk-eu-s-open-strategic-autonomy

3. PV Magazine (23 August 2023) “Solar module prices continue to fall”, available at https://www.pv-magazine.com/2023/08/23/solar-module-prices-continue-to-fall/

4. Financial Times (7 September 2023), “The era of cheap offshore wind is over in the UK”, available at https://www.ft.com/content/31a61da0-1a8c-4a1f-9658-21f24d260743

5. BloombergNEF (1 August 2023), “Soaring costs stress US offshore wind companies, ruin margins”, available at https://about.bnef.com/blog/soaring-costs-stress-us-offshore-wind-companies-ruin-margins

6. For example, Siemens Energy mentions in its Q3 FY23 analyst presentation that “new pricing and terms and conditions introduced in commercial contracts and preferred supplier negotiations since Q2 2022.” Norden mentions in its Q2 2023 analyst presentation that “EBITDA margin is expected the improve further in the second half, as extra project costs start to recede with a higher share of revenues coming from better-quality orders.”

7. See for example, EnergyVoice (4 July 2023), “Energy sector calls for CfD reform amid strike price ‘race to the bottom”, available at https://www.energyvoice.com/renewables-energy-transition/516355/energy-sector-calls-for-cfd-reform-amid-strike-price-race-to-the-bottom/

8. The lower estimate is based on May 2023’s first Irish offshore wind auction results, adjusted to UK CfD auction parameters. The upper bound is based on applying BloombergNEF’s 57% cost increase figure for US projects to the AR4 strike price. Note that the Irish contract is 5-year longer than the UK contract, and the policy interest rate is 0.75% higher in the UK than Ireland.

9. Assuming a generous 2.25% inflation rate starting from today(!)

10. Energy & Climate Intelligence Unit (7 September 2023), “Billpayers could miss out on £1bn a year in savings due to wind auction error”, available at https://eciu.net/media/press-releases/2023/billpayers-could-miss-out-on-1bn-a-year-in-savings-due-to-wind-auction-error

11. EnergyUK, “Energy UK Analysis: Allocation Round 5”, available at https://www.energy-uk.org.uk/wp-content/uploads/2023/05/Energy-UK-AR5-response-v2.pdf

12. Fulwood (2023), “A new global gas order? (Part 1). The outlook to 2030 after the Energy Crisis”, available at https://www.oxfordenergy.org/wpcms/wp-content/uploads/2023/07/NG-184-A-New-Global-Gas-Order-Part-1.pdf

13. Seatrade Maritime News (1 February 2023), “Record orderbook set to drive unprecedented LNG fleet growth”, available at https://www.seatrade-maritime.com/tankers/record-orderbook-set-drive-unprecedented-lng-fleet-growth

14. Global Wind Energy Council (28 August 2023), “Global Offshore Wind Report 2023”, available at https://gwec.net/gwecs-global-offshore-wind-report-2023/

15. NikkeiAsia (31 August 2023), “China’s offshore wind sector gears up for life after subsidies”, available at https://asia.nikkei.com/Spotlight/Caixin/China-s-offshore-wind-sector-gears-up-for-life-after-subsidies

16. Electrek (13 March 2023), “GE is developing a massive 18 MW offshore wind turbine”, available at https://electrek.co/2023/03/13/ge-is-developing-a-massive-18-mw-offshore-wind-turbine/

17. See note 15