Brighter prospects for UK offshore wind

Just two months ago the absence of any offshore wind projects in the UK government’s contracts for difference (CfD) allocation round 5 (AR5) sent ripples through the market (for full details, please see our article here). The UK offshore wind industry had for months warned that the CfD auction technology-specific ceiling price, the administrative strike price (ASP), had been set too low for the economics of projects to add up. Keen to ensure the success of the next CfD allocation round, on 16 November the government announced its plans for allocation round 6 (AR6), opening in March 2024, thereby breathing life back into its aim of achieving 50GW of offshore wind in UK waters by 2030 (up from around 14GW today).

The headline announcement from the government is a considerable rise in the ASPs for all categories of renewable energy in AR6. Fixed-bottom offshore wind will see its ASP rise by 66% from £44/MWh in AR5 to £73/MWh in AR6.[1] Meanwhile the ASP for floating offshore wind will increase 52% to £176/MWh and that for solar will grow by 30% to £61/MWh[2]. AR6 will also see fixed-bottom offshore wind move back to a separate Pot 3 auction, out of the “established technology” Pot 1 auction where competition from onshore wind and solar photovoltaic projects had been fierce. This ringfenced funding pot sends a clear signal that the government is keen to award as many CfDs as may be accommodated within the available budget.

A great first step but, as noted by Keith Anderson, Chief Executive of ScottishPower, the “real test…will come when the overall budget for the next auction round is set next year.” To mitigate the shortfall in AR5, AR6 will require sufficient budget to support a strong pipeline of both fixed and floating offshore wind projects. 

The government is also considering longer-term reforms to the CfD. Alongside the AR6 announcements, it published a consultation inviting views on what it is calling Sustainable Industry Rewards (SIR) (formerly non-price factors). The government’s preferred option is to assess offshore wind bids from AR7 in 2025 to AR9 in 2027 not just on price, but also on how much a project delivers on the economic, environmental and social sustainability of the supply chain. Essentially, an additional reward would be available for fixed-bottom and floating offshore wind projects which scored the highest following an assessment of the quality and cost of a project’s SIR proposals (with a 60:40 weighting). This reward (or SIR payment) would be additional to the existing top-up payment under the CfD. The SIR payment is intended to cover the additional devex and capex costs of a project’s proposals and would be recovered from consumers under the existing CfD supplier levy. The assessment criteria may, subject to the outcome of the present consultation, include considerations such as how supply chains’ carbon intensity is reduced, as well as how those supply chains support SMEs and create local jobs and investment in deprived areas.

The usual CfD price-based auction allocation process would continue to be held, however an additional assessment process would take place in advance of this to rate the projects’ SIR proposals. Successful projects would have their SIR commitments monitored and face a performance related adjustment if commitments were not met. The government is also considering whether a minimum standard should be applicable to ensure that even projects which do not secure any SIR payment still make a material contribution to the sustainability of supply chains. The consultation closes on 11 January 2024 and is published here.

Whilst the higher ASPs announced have been welcomed by industry, reforms beyond CfDs will be needed to meet the UK’s 2030 offshore wind target. Other changes include increasing investment in onshore and offshore electricity grids in order to advance grid connection dates and reducing the time needed for consenting of projects and associated infrastructure. Initiatives are underway to address these, but with delays pushing up project costs, these issues must also be prioritised.

[1] All prices quoted in this article are in 2012 prices unless otherwise stated.

[2] For full details of ASPs and auction parameters, please see the UK government’s AR6 portal: Contracts for Difference (CfD): Allocation Round 6 - GOV.UK (www.gov.uk)