United Kingdom

United Kingdom

WindEconomics: UK continues trend of falling costs

UK: The UK government's Department for Business, Energy and Industrial Strategy (BEIS) published its contracts for difference (CfD) second allocation round results on 11 September.

Low offshore prices in UK CfD auction came as a surprise for some (pic: MHI Vestas)
Low offshore prices in UK CfD auction came as a surprise for some (pic: MHI Vestas)

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Three contracts will be awarded to offshore-wind projects, six to "advanced conversion technologies", and two to dedicated biomass with combined heat and power (CHP).

Offshore wind secured by far the biggest allocation, with 3,196MW, and the low prices — £74.75/MWh (€84.5/MWh) for projects to be commissioned in 2021/22, and £57.5/MWh (€65/MWh) for projects following in 2022/23 — caused considerable surprise.

The announcement triggered a critical response from the Global Warming Policy Foundation (GWPF) in a report that concluded: "The low CfD prices are commercial speculation, not the dawn of a new age for offshore wind and renewables."

The GWPF proclaimed it "is deeply concerned about the costs and other implications of many of the (global warming) policies currently being advocated" and has published other reports critical of the costs and benefits of wind energy.

Are these prices realistic?

The UK prices are not directly comparable with other offshore-wind prices that have been discussed in Windpower Monthly recently, partly because they are only paid for 15 years, and partly because they are linked to the consumer prices index (CPI).

The 15-year restriction pushes prices up, but the index-linking is a benefit.

As BEIS quotes prices in 2012 levels, this means the 2021/22 figure of £74.75/MWh has already inflated to around £81.5/MWh (€92/MWh), while the price to be paid for the contracts to be commissioned in 2022/23 has risen to £62.7/MWh (€71/MWh).

If the tariff were not index-linked, this figure would need to be around £65/MWh (€73.5/MWh).

In 2016, KIC InnoEnergy and BVG Associates published a report examining the potential for cost reductions in offshore wind.

This concluded that a levelised cost of around €77/MWh was achievable by 2025. Adjusting this cost for the shorter-term of 15 years, contract prices in the UK give a value of €86/MWh.

If, however, the price of wind turbines were to come down to around €1,200/kW, rather than the €1,400/kW assumed in the study, and increased investor confidence enabled the weighted average cost of capital to come down from 8% to 7%, the figure of €73.5/MWh, quoted above, would be achievable.

As there are other factors that could contribute to lower energy costs — higher wind speeds, for example — there seems no reason to doubt the viability of the contract prices.

Counter arguments

The principal arguments advanced by the GWPF are that the energy prices are unrealistically low compared with the prices awarded in the 2015 round, which were around twice as much and that there is no evidence that capital costs are falling.

It also argues that "developers see the CfD as a low-cost, no-penalty option for future development... that can easily be broken".

The foundation suggests that possible increases in carbon tax could mean that it may be more profitable to rely on wholesale electricity prices rather than the CfDs.

The latter possibility would be a gamble; projections by BEIS show that the average wholesale price during the contract period may be around €62/MWh in a "high-prices" scenario, but lower in other scenarios.

Recent data on capital costs are sparse, but low contract energy prices for other European wind projects have recently been reported in Windpower Monthly.

Offshore wind faces little opposition from other low carbon-energy sources, as can be seen from the modest capacities they were awarded in the allocation round.

"Advanced -conversion" projects are mainly energy from waste. Solar and onshore wind projects were not eligible to bid.

AT A GLANCE - THIS MONTH'S REPORT CONCLUSIONS

Offshore wind strike prices: Behind the headlines, Global Warming Policy Foundation, 2017 Argues the offshore prices are speculative, and the projects may not be built

Future renewable energy costs: offshore wind, KIC InnoEnergy and BVG Associates, 2016 Detailed analysis of how offshore wind prices may evolve up to 2030 concluded that a levelised cost of around €77/MWh was achievable by 2025

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