The UK’s next tender will precede proposed biennial tenders through the 2020s and will set the tone for offshore wind development in the country over the next decade.
Strike prices will be capped at £56/MWh for projects coming online in 2023/24, down from the lowest successful bids of £57.50/MWh in September 2017. This bid cap then falls to £53/MWh for wind farms becoming operational in 2024/25.
Overall, there will be £60 million of top-up support provisionally available. This budget will be allocated to fill the gap between market prices and prices agreed with the government under the CfD scheme.
In terms of funding steel in the water, this could translate to between 1.9GW and 3.2GW of offshore wind capacity, according to consultancy Cornwall Insight.
Even if the lower end of this prediction is awarded it would just about be enough to meet the government’s unofficial target of delivering between 1GW and 2GW each year through the 2020s.
The gap between strike and reference prices is also narrowing, meaning developers are closer to refunding excess profits to the government.
Strike prices have been on a downward trajectory worldwide, while reference prices in the UK appear to be on a slight upward trajectory, at least in the near-term. As strike prices fall below market prices developers could actually end up paying back revenue to the government.
Subsidy-free UK offshore wind, anyone?— Simon Evans (@DrSimEvans) 4 October 2018
So…remember those record-low contracts signed last year?
Rising wholesale power prices mean they would be effectively "subsidy-free", at £57.50/MWh (£64 in today's money) vs. current power cost of… £64. pic.twitter.com/y1npVWEk4H
The Department of Business, Energy and Industrial Strategy (BEIS) forecasts day-ahead hourly prices — "reference prices" — of £48.62/MWh, rising to £51.32/MWh for 2023/24 and 2024/25 respectively. Bids sufficiently below these anticipated market prices would trigger this windfall for the government.
Baseload and intermittent reference prices for future CfD Delivery Years (BEIS)
Price reductions across the UK’s previous two auctions demonstrate the industry’s ability to reduce costs and, judging by the caps on strike prices for its next tender, this trend is set to continue.
The cost of wind has fallen worldwide and with a mature supply chain and infrastructure already in place, the UK has a head start on further reductions.
Developers could leverage existing infrastructure and even extending existing projects. In October, seabed landlord The Crown Estate accepted applications to double the capacity at eight offshore wind farms — a potential capacity increase of more than 3.4GW. Whether the developers of these projects will enter the tender remains to be seen.
Either way, prices could fall even further.
On the other hand, the £60 million budget is just over a fifth of the £290 million available in last September’s tender. And the potential capacity awarded is a deceleration of the industry’s ambition of installing 30GW in UK waters by 2030.
This smaller budget and reduced ambition is unlikely to excite investors.
The £60 million is also only a small portion of the £557 million the government promised for future CfD funding, though it did not confirm what period this is supposed to cover.
Apportioning this amount equally across the 2019 tender and the biennial tenders of the 2020s would have given investors greater certainty over the level of funding available every two years.
It would also have supported an even build-out of capacity, providing the supply chain with a long-term outlook. This might also have encouraged the establishment of further manufacturing sites in the UK, bringing long-term jobs and the associated benefits.
Front-loading the spending — by having larger budgets for the first of the planned tenders — would have accelerated build-out in the near-term and enabled the leveraging of new infrastructure and possibly even the extension of new sites.
It could also have sped up the fall in offshore wind costs, as it would allow developers and the supply chain to invest in new technology. This supply chain could also export across the world as other markets ramp up. Investing early might mean the government misses out slightly on technological development, but it would cement the "first mover" status in offshore wind, and develop the skills that could be deployed in other markets.
Finally, back-loading the spending — which appears to be closer to the government’s intentions — would mean the government benefiting more from lower costs towards the end of the next decade, assuming they continue to fall and eventually subside below market prices.
By having smaller budgets in 2019 and the early 2020s, the government could set the maximum strike price for future offshore auctions.
If offshore wind prices do fall below market prices in the middle of the next decade, the government will soon be receiving money from investors, rather than supporting them. By back-loading the funding, and therefore capacity installations, the government can maximise the amount of payments it receives.
However, with uneven spending plans, investors do not have maximum visibility of the auction budget, making decisions on where to put the money more difficult. Further, with deferred spending, it could be harder to leverage infrastructure later in the decade. It could also never materialise, as administrations and government priorities change quickly, not least as the UK looks set to stumble out of the European Union.
Modest growth plans for market leader
With nearly 8GW of capacity operating in its waters — more than the national total of any other market — offshore wind has been a huge success story in the UK.
Despite low-carbon electricity levies, previously used to fund subsidies, being unavailable until 2020 at the earliest, the UK government has been broadly supportive of the sector, even going so far as to draft a bespoke deal with the industry.
It has proposed biennial tenders throughout the 2020s, giving visibility to developers and investors alike, and has funded innovation and research in the offshore wind industry.
Against this backdrop, the budget for the May 2019 auction is perhaps underwhelming. But with declining costs and the government’s apparent anticipation of further price reductions, £60 million may go further than expected.