Offshore Wind snub shows need for Government rethink

• No bids cleared from developers to build new offshore wind farms in the latest round of UK government CfD auctions
• LCP Delta analysis indicates auction strike price was unattainable for developers
• Outcome follows months of calls from industry for greater support amid rising costs and supply chain issues
• LCP Delta says the UK Government must learn from the results but insists there is no need to panic

8 September 2023 – The UK Government must launch a thorough review of its Contracts for Difference (CfD) process after offshore wind developers failed to secure a CfD contract in the latest round of auctions, says LCP Delta.

As was feared, no offshore wind has been awarded a CfD contract in this year’s auction putting in doubt the Government’s commitment to its own offshore wind targets. LCP Delta’s forecast of the AR5 round of auctions had signalled that the Administrative Strike Price (ASP) set in this year’s allocation round for offshore wind (£44/MWh) was lower than the cost of financing offshore wind projects and therefore no contracts would be signed. This had also been strongly signalled by developers throughout the year. In addition to the lower strike price, offshore wind was competing in the same funding pot as onshore wind and solar for the first time, increasing the level of competition in the auction.

The CfD auction for this year has cleared 1.9GW of solar (13% less than AR4) and 1.4GW of onshore capacity, which is over double the capacity cleared in the previous auction (AR4). The clearing price have also increased with solar CfD contract receiving a strike price of £47/MWh (increase of 2% from AR4) and onshore wind clearing at £52.99/MWh which is a 23% increase from AR4. Overall, the total capacity procured in AR5 is down by 66% compared to AR4. According to LCP Delta, had the offshore wind projects cleared the auction then the total capacity procured this year would only be 20% less compared to AR4; which, given this is an annual rather than biennial auction, would keep the UK on track to meet its huge renewable build out requirements.

Last year’s AR4 round secured nearly 6GW of capacity for offshore wind, with £200m of the £265m budget being allocated to offshore wind projects. This was achieved off the back of record low ASPs, which reached as low as £39.65/MWh. However, as the auctions have reduced from biennial events to annual, the budget for AR5 is lower.

Furthermore, the inflationary pressures, higher interest rates, and supply chain disruptions have caused significant hikes in the cost of large-scale construction projects in the past 12 months. The problems facing the industry were demonstrated earlier this summer when Swedish developer Vattenfall halted development of the 1.4GW Norfolk Boreas site, claiming that a 40% rise in costs made the project no longer financially viable.

The results of the auction demonstrate that the UK's Department for Energy Security and Net Zero must reconsider their modelling and budget allocations to offer more attractive ASPs if they are to reverse this result in future auctions, which is essential in order to stay on track to reach the goal of 50GW of offshore wind by 2030, a key cornerstone of the UK’s net zero strategy.

Chris Matson, Partner at LCP Delta, said: “The results are discouraging, but ultimately not surprising due to the economic circumstances. Offshore wind development is a logistically and technically demanding challenge, and factors such as the rise in capex and supply chain constraints have impacted it more than other renewable technologies such as onshore wind and solar.

“This is a bump in the road, and the government has time to reflect on these results and adjust the parameters ahead of next year’s auctions. The goal of reaching 50GW by 2030 is still achievable, but only by listening to industry leaders who have been vocal in their concerns of rising costs lately.”