Today’s announcement about the next Contracts for Difference (CfD) auction round is very welcome. The deployment of offshore wind has been one of the most significant achievements of successive Conservative governments, with the UK second only to China in terms of overall offshore wind capacity. Lifting the price cap on offshore wind bids will help to get the renewables rollout back on track, enabling the government to champion their impressive record in the run-up to the election and celebrate the sector’s role in cutting emissions, creating jobs, and protecting bill-payers from volatile fossil fuel markets.
This is a conservative move. Lifting the cap will enable the market to function properly and ensure new offshore wind is procured. Auctions are much better at price discovery than Whitehall, after all. While understandably trying to maximise value for money in the last auction round, the government missed out on new offshore wind by not sufficiently taking account of higher supply chain and financing costs. As well as lifting the price caps, ministers should try to catch up on the lost capacity from the last round, by setting a larger budget for the next auction round.
Until the recent spike in inflation, CfDs had driven down renewables prices dramatically - with offshore wind strike prices falling from £120/MWh in the first auction round to less than £40/MWh in the fourth one. Fierce competition for contracts caused developers to slash their prices, while the revenue certainty they provided helped to dramatically reduce financing costs. In 2022, when Putin’s invasion of Ukraine sent gas prices spiralling, CfDs mitigated bill rises for consumers, paying back over £350 million. They’ve also made us more energy secure: UK net gas imports in 2030 would have been around 50% higher without the capacity procured under the CfD scheme.
The reasons for higher offshore wind costs are well-documented. Prices across the supply chain have risen, as raw materials, minerals, and energy have become much more expensive. Financing costs have also increased with global interest rates rising in response to high inflation. Although CfD strike prices are inflation linked, the scale of cost rises across the sector - estimated to be 40% - have far outstripped inflation. There is good reason to hope these factors will recede as interest rates plateau and start to fall back as inflation peaks, and as capacity in the supply chain expands with the construction of new factories. But, at least in the short term, strike prices need to rise.
Even with the higher cap announced today, new offshore wind will be cheaper than the current wholesale price of electricity, which is well above £100/MWh at the moment. Compared to gas, offshore wind is also less susceptible to the whims of petrostates and dictators, who control the major gas reserves that set the global price. Our own domestic gas supplies from the North Sea are in steep and terminal decline, meaning a gas-based power system would be highly dependent on expensive, carbon-intensive LNG. By contrast we have the ideal long coastline, high wind speeds, and shallow seas for offshore wind. If we want a grid that is powered by affordable domestic energy sources, then more offshore wind is essential.
Of course there are additional costs with renewables that need to be minimised through policy. Renewables require new grid connections, storage, and low-carbon, back-up generation. The proposed introduction of spatial planning, as well as changes to the Capacity Market and the creation of the Future Systems Operator, could help to keep those costs down. Alongside these measures, it is important the government continues to bring more clean flexible power online, while maximising the use of demand-side response technologies.
The other lever the government could pull is to massively expand capacity in the renewables supply chain, through attracting more investment into offshore wind factories. The announcement today of ‘Sustainable Industry Rewards’, whereby renewables developers can unlock higher payments by creating local supply chain jobs, will help. The government could make further progress at the Autumn Statement by making full expensing permanent, boosting tax incentives inside freeports and investment zones, and funding more port upgrades.
While some will inevitably try to use today’s announcement to highlight the costs of renewable energy, it is important to remember that the government has spent over £78 billion subsidising energy bills because of our reliance on expensive gas. Moving away from a gas-dominated energy system will be better for consumers and for taxpayers. The government deserves significant credit for taking this step today, which will help restore confidence in the offshore wind sector, unlock investment in the UK’s industrial heartlands, and safeguard our energy security.
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