UK offshore wind auction price cap increased

Ronan Lambe and James Todd of Pinsent Masons, who specialise in offshore wind and other renewable energy projects, were commenting after the government increased the maximum price that offshore wind developers could bid in the auction by 66%, to £73 per megawatt hour (MWh).

The decision comes after no offshore wind developers bid during the last round of the auction earlier this year, after the government set the maximum price at £44 per MWh, down from £46 per MWh in the previous auction, despite the industry warning that the price cap had to rise to account for inflation and other rising costs associated with delivering new projects.

The government has confirmed price cap rises for other renewable energy technologies too, ahead of the sixth round of the renewables Contracts for Difference (CfD) auction in 2024. Developers behind prospective floating wind projects can bid up to £176 per MWh, up from £116 per MWh in the last auction, while the maximum price for geothermal, solar, and tidal projects has also been increased by 32%, 30%, and 29% respectively.

Lambe said: “As we move to deeper waters and floating wind represents an increasing proportion of offshore deployment, it’s clear that a race to the absolute bottom on strike prices isn’t going to encourage the required capacities to deploy. It’s heartening that the government appears to have finally heeded industry’s calls on this topic.”

“This is something which needed to happen, or there was a real risk of missing the 50GW by 2030 targets. The budget for the upcoming and subsequent allocation rounds needs to be set with the intention of getting us back on track to achieve that target,” he said.

CfD auctions are the government’s primary method of supporting renewable energy. They are designed to support low-carbon electricity generation by providing direct protection from volatile wholesale prices for developers working on projects that have high upfront costs and long lifetimes. The auctions also protect consumers from paying increased support costs when electricity prices are high.

In an effort to scale-up renewables production, the government has moved from holding renewable CfD auctions every two years to staging them annually. Allocation Round 5 earlier this year was the first since the change.

Todd said: “The third and fourth CfD allocation rounds were very successful in terms of delivering lower strike prices for offshore wind, but it was always going to be a difficult ask to sustain that downward trajectory in the current economic environment. In the most recent round, many in the sector ultimately concluded that projects were not viable at the strike prices proposed, so today’s news is a welcome and essential step by the government ahead of next year's round. It’s now imperative that the sixth allocation round is very good for offshore wind to make up for lost time, and capacity.”

“The increase in pricing for floating offshore wind is also welcome, and it will also be interesting to see if some of the outcomes from last year's consultation about reform for future allocation rounds are implemented. In particular, the consultation decision which was published in July talked about bringing greater flexibility to how we legally define ‘floating offshore wind’ to maximise scope for innovation, and that will be an area for focus,” he said.

Industry also welcomed the government’s announcement.

Chair of the Offshore Wind Industry Council (OWIC) Richard Sandford said: “Having the right framework in place for private investors is essential for the development of new UK projects which will get us closer to our shared target of 50GW by 2030, create jobs and offer consumers lower cost power at scale. The potential economic prize is huge – growing our offshore wind supply chain alone represents a £92 billion boost to the UK economy by 2040. This is why we're already working with the government on an industrial growth plan for offshore wind to ensure the UK grasps the opportunities available in our domestic market and growing global demand.”

“The offshore wind industry will continue to work closely with ministers to retain the UK's position as a global leader in offshore wind, ensuring that each annual auction round enables us to build on our success,” he added.

Speaking on BBC Radio Four’s Today programme on Thursday morning, SSE chief executive Alistair Phillips-Davies said “two substantial auction rounds” are now needed in 2024 and 2025, where 10-12GW of additional offshore wind capacity is provided for in each round, to ensure the UK can meet its target of 50GW by 2030. He also called on the UK and Scottish governments to help get existing projects in the pipeline “over the consenting line”.

In its announcement, the government confirmed that, for the 2025 renewables CfD auction, new social and environmental criteria will be considered when bids for allocation of available capacity are reviewed. It said the ability of projects to “reduce carbon emissions in their supply chains and demonstrate positive social impact on communities” will be factored into the decision-making process.