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UK Offshore - Economics - Getting the support level right

The UK government needs to increase the level of financial support it provides to the offshore wind sector, confirms a report published in late April by financial advisory firm Ernst & Young. The increased costs of building and operating offshore wind power projects in recent years has made the economic case for developers seeking to construct and own offshore wind farms "increasingly difficult to justify, both by themselves and when compared to other economic investment choices," it says. "This is cause for concern given the contribution offshore wind is likely to make to the UK's renewable energy strategy."

The report, Cost of and financial support for offshore wind, was commissioned by the Department of Energy and Climate Change so it could reassess the economics of offshore wind and the effectiveness of its support regime, which is based on a renewables obligation (RO) on electricity retailers. Wind farm owners sell ROCs to retailers to raise income in addition to sales of electricity. Retailers acquire ROCs to comply with the obligation that a rising proportion of their electricity sales come from renewable sources of energy. Currently, 1.5 ROCs are awarded for 1 MWh generated offshore.

Ernst & Young says that to provide a reasonable economic return for project developers and operators, support needs to increase to 2-2.5 ROCs. In the budget, just days before the Ernst & Young report came out, Chancellor Alistair Darling announced plans to increase the level to 2 ROCs for the financial year 2009-2010 (Windpower Monthly, May 2009). It is a short-term boost only, however. In 2010-11 the level falls back to 1.75 ROCs, and then back to 1.5 the year after that.

Ernst & Young points out that average offshore wind capital costs have doubled over the last five years to around £3.2 million/MW. This has been driven by supply chain constraints for components and services, but also to a lesser extent by recent fluctuations in euro-sterling exchange rates and commodity prices. Average expected annual operating and maintenance (O&M) costs, meanwhile, have increased around 65% over the same period to around £79,000/MW. The rise in O&M costs is due to a greater level of experience in running such projects, it says, and a change in O&M philosophy - operators are adopting a more proactive maintenance approach with a view to extending the life of assets. "The relative immaturity of the supply chain for offshore wind components and support services appears to be driving market inefficiencies, which have led to significant cost increases, particularly relating to the cost of procuring and installing wind turbines and foundations," it adds.

The government must, though, make sure that "any change in the RO banding for offshore wind does not create the impression of RO policy instability." The relative merits of different measures to support offshore wind over the short to long term, such as investment or production tax credits and capital grants, should also be considered.

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