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Industry ‘relief’ as UK ups CfD strike prices

Confirmation of a 66% rise in strike prices offered to offshore wind developers will go some way towards restoring confidence in the sector – but it is no panacea.

The Department for Energy Security Net Zero (DESNZ) confirmed on 16 November that it would increase the price paid for power from offshore wind projects as part of the upcoming sixth allocation round (AR6) of the Contracts for Difference (CfD) scheme next year.

The maximum strike price has been increased by 66% for offshore wind projects, from £44/MWh to £73/MWh, and by 52% for floating offshore wind projects, from £116/MWh to £176/MWh.

It’s worth bearing in mind these are in 2012 money, meaning the cost of power is closer to £100/MWh when adjusted for inflation – roughly in line with average month-ahead wholesale power prices. Though floating wind begins to look somewhat steeper at £241/MWh in 2023 money.

In addition, offshore wind will also be given a separate funding pot in recognition of the high number of projects ready to participate, the department said.

It’s a welcome boost for the wind industry, to whom the government appears to have listened very closely following the washout result of AR5. The lack of any offshore wind bids whatsoever cast a long shadow over the government’s flagship clean energy procurement programme and marked the latest development in a brewing crisis amongst a sector struggling to get a grip on inflationary pressures.

Vattenfall’s European Offshore Wind Demonstration Centre off the coast of Aberdeen

Claire Coutinho, energy security secretary, noted: “We recognise that there have been global challenges in this sector and our new annual auction allows us to reflect this.”

Meanwhile, strike prices will also rise for other technologies, including a 32% rise for geothermal technologies from £119/MWh to £157/MWh; 30% rise for solar, from £47/MWh to £61/MWh; and 29% boost for tidal, from £202/MWh to £261/MWh.

DESNZ said the changes would ensure projects are “sustainably priced and economically viable to compete” in AR6.

Listening excercise

Regen described the result as a “relief” for the sector, hailing “a very positive response”.

“Credit should go to government officials who have worked intensively with developers and industry experts to ensure that the strike prices in AR6 properly reflect the significant hike in project costs that has affected the entire energy sector.”

DESNZ’s announcement reflected those “intensive” discussions, with executives from host of developers lined up to welcome the news, including the likes of Orsted, SSE, ScottishPower and Equinor.

EDF Renewables UK boss Matthieu Hue spoke of a “step in the right direction to putting the UK back at the forefront of renewable deployment.”

“The Contract for Difference is fundamentally a good mechanism, and a sustainable administrative strike price will drive investor confidence, economic growth and lower electricity bills,” he added.

“It is encouraging that the concerns raised by ourselves and the rest of the industry in recent months have been listened to and we look forward to seeing further detail on the budget parameters over the coming year to match the ambition of today’s announcement.”

Show us the money

As Mr Hue indicates, equally important as strike prices is the total budget on offer, which has yet to be confirmed.

Claire Mack, chief executive of Scottish Renewables said it was “essential” that the budget on offer was sufficient to meet Scotland’s renewable energy ambitions and maximise the number of projects which can be successful.

Tim Dixon, senior consultant at Cornwall Insight agreed that a “more competitive” auction now looks likely, with a greater number of eligible renewable projects able to compete thanks to more sustainable support.

“However, we must not get ahead of ourselves, the decision to separate offshore wind into its own pot will reduce competition between it and other established renewable technologies,” he added.

“While this is supportive for offshore wind and could stimulate investment, setting appropriate budgets will now be essential to ensuring continued competition, supporting enough capacity across a range of technologies, and delivering good value for consumers.”

With warnings heeded, expectations for the auction are rising. Industry sources suggested around 8GW of offshore wind could be ready to bid in AR6 today while another 7GW could be ready by the time that the auction is held.

With up to 15GW of offshore wind in play, they hoped around 10-12GW could be secured – a huge step towards the looming targets of 50GW of capacity by 2030.

“A lot now depends on the budget allocation – with up to 15 GW of offshore wind potentially in the mix there is an opportunity here to, not only regain lost ground, but to reenergise investment in the offshore sector,” said Regen director Johnny Gowdy.

“A shout out also to onshore wind and solar which at £64 and £61 per MWh (2012 prices) still represent great value for money and ought to be supported.”

Yet the issues around wider inflation and the supply chain are by no means resolved, and an overhaul to future auctions is still required to ensure the benefits of procurement are fed back into that supply chain.

As Mr Dixon notes: “The government’s consultation on non-price factors acknowledges these concerns to some extent, but the road to a sustainable energy future is undeniably complex.

“There are strong headwinds facing the renewable sector, and while these announcements are a positive step, the government has some very ambitious targets which leave very little room for error.”

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