The latest auction for government renewable energy contracts received zero bids to build offshore wind capacity. How did this happen, despite the UK’s ambitious renewable energy targets? Anthony Mayall, Chief Commercial Officer at Sustainable Energy First, explains.
The auction on 8 September which failed to raise any bids for new offshore wind was part of the government’s Contracts for Difference scheme. Contracts for Difference (CfD) began in 2014 as a mechanism for the UK government to support private developers of renewable generators.
How CfD works
Building new generation infrastructure carries risks for business: high upfront costs and potential energy price volatility. CfD was designed to remove those barriers to investment by guaranteeing a certain price for the energy over a 15-year period. The government does this through a company it set up for the purpose called the Low Carbon Contracts Company (LCCC). Each Contract for Difference is a legal agreement between the LCCC and a generator. The auctions, or allocation rounds, involve different renewable developers competing against each other for those contracts.
50GW target at risk
The September 2023 allocation round was the fifth of its kind. There were plenty of successful bids to develop solar and onshore wind capacity. But, for the first time since CfD began, there were no bids at all from potential developers of offshore wind projects.
This has serious implications for the UK’s renewables strategy. Spring 2022’s Energy Security Strategy committed the government to delivering 50GW of offshore wind capacity by 2030. That would be more than enough to power every home in the country. Experts say the recent auction has jeopardised the success of this target. And industry voices agree that the main reason for the failure was because the price the government offered developers did not take into account rising costs.
Before launching a CfD auction, the government determines the Administrative Strike Price (ASP) for each technology. This is the maximum price per MWh that a project can receive, so bidders have to offer a price below it to compete. The ASP varies depending on the specific type of technology and the costs of generation.
The challenge when setting a strike price is to get value for public money while still encouraging healthy competition. For Round 5 of CfD, the government failed on the latter. It set a maximum ASP of £44/MWh, which includes the cost of the grid connection. This might have been a competitive rate two years ago, but since then the costs of developing offshore wind capacity have risen sharply. The price of structural steel in the UK hit £1,300 per tonne this year, and businesses also have to reckon with squeezed supply chains and labour shortages.
Businesses that might have been expected to bid in the fifth CfD auction, including the UK’s largest renewables generator SSE, ruled themselves out in advance on cost grounds.
The failure of Round 5 to deliver any new offshore wind projects has raised questions about the structure of CfD. DESNZ minister Graham Stuart had a sticky half-hour in the Commons after shadow energy minister Ed Miliband tabled an urgent question on the subject, describing the auction as “an act of economic self-harm”. Stuart then faced a grilling from a number of MPs, including his fellow Conservatives. He responded to the criticism by accusing various parliamentary colleagues of “talking the country down” and “hating private investment”.
Politicians and industry voices don’t necessarily agree on exactly what should happen next, but there is a clear consensus in favour of reform. Industry body RenewableUK said that if the fifth round had been successful, it could have led to 5GW of offshore wind capacity being built. This would have saved UK consumers £2 billion a year compared to getting the same power from gas. In other words, trying to save money by keeping the strike price down has cost the public purse more in the long run.
Wind Power Monthly argued that more flexibility is needed in regard to the strike price. The ASP for the fifth round was set in December 2022 – a very long time ago in politics and economics. They argue for “new flexibility to modify [the ASP] closer to the auction in response to world events”.
It is not clear how the government will respond to the pressure for change, but the disastrous outcome of the fifth CfD round should be a wake-up call for the new energy secretary.