Offshore wind energy warning as authorities public sale flops

Energy trade leaders have warned the UK may fall behind a key goal for brand new offshore wind energy forward of the outcomes of a authorities public sale that’s broadly anticipated to flop.

Multiple trade sources have informed Sky News the public sale, the outcomes of that are anticipated to be introduced on Friday, has obtained little or no curiosity.

Insiders say the method has struggled to draw bidders as a result of the federal government has set the utmost worth turbines can obtain as too low, failing to mirror the rising prices of producing and putting in generators.

The trade has been hit by inflation that has seen the value of metal rise by 40%, provide chain pressures and will increase in the price of financing.

Several corporations, together with the UK’s largest renewables generator SSE, have dominated themselves out of the public sale, with one supply saying the variety of potential bidders was “between two and zero, with expectations at the lower end of that range”.

The renewables public sale is an annual course of by which the federal government makes an attempt to incentivise personal sector funding in a variety of energy sources by way of a mechanism often known as “contracts for difference” (CfDs).

The public sale works in reverse, with the federal government setting a most reference worth, successfully a cap on what customers will be charged, and in regular circumstances turbines bid under that to offer energy over a 15-year contract.

Under the CfD, turbines are assured a worth for the facility they produce, with the federal government making up the distinction if wholesale costs fall under that worth.

When wholesale costs are greater, as they’ve largely been for the reason that Ukraine conflict started, turbines pay the distinction above the assured worth again to the Treasury.

‘The sums did not add up’

In principle this delivers worth to customers and suppliers however the chief govt of SSE, Alistair Phillips-Davies, informed Sky News the value cap on this public sale of £44MW/h, solely a bit of above final yr’s worth, meant it was not viable.

“For the project we had, which is a little smaller than some and in deeper waters further north in the UK, we just wouldn’t have been able to even get a bid in at that cap price,” he mentioned.

“The sums didn’t add up, we wouldn’t have been able to make an economic bid at that level. We’d have been struggling with write-offs, and we’ve seen some competitors in the sector have unfortunately suffered in recent weeks.”

Mr Phillips-Davies mentioned the federal government wanted to behave now to ease market situations for the renewables sector to make sure subsequent yr’s public sale generated capability.

He recommended extra taxes on renewables income be withdrawn in 2024 relatively than 2028, bringing the UK in keeping with Europe, extending capital allowances to compete with the US subsidy regime the Inflation Reduction Act (IRA), in addition to guaranteeing a extra sensible worth cap within the subsequent public sale spherical.

He pointed to a current public sale in Ireland, working below a unique construction, that set a worth of €150 MW/h.

He mentioned: “I think people will need to look at the cap, while being sensitive to what consumers should be paying, and what we’ve got to do is be ambitious next year.

“We’ve bought to be considerate about what we do and guarantee that the subsequent public sale is constructed not solely to get individuals to win an public sale, however to really construct a bit of equipment.”

This auction round, technically known as Allocation Round 5 (AR5) is expected to attract bids for solar and onshore wind capacity, but failure to secure significant new offshore wind capacity would be a blow to the government’s target of reaching 50GW by 2030.

It will also intensify the increasingly sharp debate over the true cost of achieving net zero to consumers and the public purse, as the energy transition moves from abstract policy theory to practical delivery.

Insiders say officials were repeatedly warned by industry that the auction would fail unless the price was increased.

Shadow energy secretary Ed Miliband said this week ministers “had put their fingers of their ears.”

The UK currently has 14GW of functioning offshore wind capacity, placing huge pressure on the next two annual auctions to fill the gap.

Offshore wind is the backbone of the UK’s renewable energy supply, providing 40% of electricity last year, and the target is a crucial plank in the wider goal of reaching net-zero by 2050.

Previous auctions have been successful in increasing offshore wind capacity, with last year’s round attracting 7GW of capacity from five operators.

One of those projects, run by Swedish state-owned power company Vattenfall, has already been mothballed however because of rising costs hitting the industry.

‘Very difficult market’ for offshore wind developers

Lisa Christie, UK country manager for Vattenfall, told Sky News the investment model no longer matched economic reality.

“The economics in the mean time merely do not stack up,” she said.

“There’s a lot of causes for that. It’s the conflict in Ukraine, we have seen rises in inflation, we have seen rises in the price of capital, clearly rises in commodity prices.

“You put all of that together. And it’s just a very, very difficult market environment for offshore wind developers right now.

“I feel we’re at a really troublesome level. And we have now lots of offshore wind farms, together with Vattenfall, that have not been in a position to take fields the place maybe you would not have anticipated them to do.

“So there is a challenge in the industry, I don’t think is insurmountable and there is still time for the government to turn this around.

“So what we’re actually searching for is to place the CfDs again onto a financially sustainable footing after which we will reap the advantages that elevated offshore wind deployment deliver.”

Concerns UK will lose offshore wind superiority

Major suppliers to the industry are also concerned that any political drift in the build up to the election could see the UK lose its pre-eminence in offshore wind.

Laura Fleming, the UK managing director of Hitachi, which produces high-voltage direct cables that bring power onshore, said the UK needs to compete with more generous subsidy regimes around the world.

“The funding local weather within the UK must ship a transparent sign that we’re open for enterprise, and in comparison with the IRA within the US, and the brand new inexperienced deal in Europe, we have to be sure that we nonetheless stand out.”

The renewables industry insists that even at a higher price in this auction, wind power would still be substantially cheaper than fossil fuel alternatives. At their peak last year wholesale gas prices were up to nine-times higher than offshore wind strike prices.

Renewables generated under CfDs can also return money to the taxpayer. Since the invasion of Ukraine forced up electricity prices many wind farms operating under CfDs have been paying back millions of pounds to the Treasury.

Mr Phillips-Davies said: “We’ve bought to recollect in the mean time offshore wind is trying a discount in comparison with wholesale power costs. It’s half the value or much less of the place the present market is, so we have to be constructing extra.”