Energy industry trade association Energy UK has warned that the upcoming Contracts for Difference (CfD) auction will not be sufficient to meet the UK Government’s 2030 target of 50 GW offshore wind capacity.

There is only 27 GW in operation or receipt of a CfD contract, so future offshore wind developments will almost exclusively have to come through the program. This means the forthcoming auctions must deliver another 23 GW. The Energy UK analysis, however, shows that the program will fall short of achieving this.

The long lead-in times for such projects mean the extra capacity must come from the subsequent three annual auctions, working out at a record 8 GW each round.

However, the upcoming auction is expected to bring forward, at best, 3.2 GW of new capacity, which is 4.8 GW short of the necessary amount.

CfD is a system of reverse auctions introduced in the UK to assure investors the certainty they require to invest in low-carbon electricity generation.

The Changing Cost of Offshore Wind

The UK has made remarkable progress in lowering the cost of offshore wind energy through the CfD program, which guarantees a fixed price for electricity generated from renewable sources. Offshore wind costs have fallen by 80% in less than ten years due to the long-term vision and support of the Government.

However, the sector is facing some headwinds that could affect its competitiveness in the future. Factors such as rising inflation, higher borrowing costs, supply chain bottlenecks, and regulatory changes have increased the costs of developing and operating offshore wind projects. The next allocation round, scheduled for this year, may not reflect these cost pressures sufficiently.

Likely Outcomes of the Upcoming Auction

The upcoming auction includes offshore wind along with solar and onshore wind markdown. The capacity delivered will depend on the bids from developers and is limited by the auction budget and the difference between the strike price and reference price.

The strike price is a price for electricity reflecting the cost of investing in a particular low-carbon technology. In contrast, the reference price measures the average market price for electricity in the British market. The CfD program protects developers from volatile wholesale prices by paying them the difference between the strike and reference prices. When wholesale prices are high, developers pay back the difference to reduce the net costs of the program to consumers.

According to Energy UK, due to supply chain pressures and rising capital costs, it’s unlikely that the strike price for offshore wind will be lower than the previous auction and is capped by the administrative strike price (ASP). Based on possible strike prices of the last auction (£37.35 (~$47.20)/MWh – £44 (~$55.6)/MWh), a maximum of 3.2 GW could be secured, assuming 100% of the budget is allocated to offshore wind.

The consequences of missing capacity

Since only 3.2 GW is expected to be secured, the UK will have to rely on gas to fill the gap. This would incur additional costs of £530 million (~$700 million) per year to consumers on their electricity bills by 2030, resulting in 6 million tons of carbon emissions annually.

Following Auctions

The following auction round is unlikely to deliver the required offshore wind capacity as the budget is £80 million less than the previous round, and offshore wind is competing with other established technologies for less funding.

Moreover, the price cap for offshore wind is set at a lower than the average clearing price witnessed in the previous round. The ASP is supposed to act as a safety net to prevent excessive bids. Still, it does not consider the recent cost increases developers face due to supply chain constraints, rising raw material prices, and COVID-19 impacts.

The ASP also does not account for the higher costs of developing projects in deeper waters and further from shore, which is expected to dominate the pipeline in the upcoming auction.

Recommendations to Reduce the Shortfall

Energy UK has outlined three key recommendations for the upcoming autumn budget, including revisiting and increasing the budget of the upcoming auctions for CfD; raise the ASP, as it does not reflect the increased costs and risks of developing and building critical infrastructure projects in the current climate; a robust response to increased global competition for clean energy from the U.S. and EU, which have announced ambitious plans and policies to accelerate the transition to a green economy.

UK government had announced that it would introduce non-price factors in its CfD program for renewable energy projects as a major shift from the cost-only model to ensure the viability of such projects in the long term.

Early last year, the country outlined an Energy Security Strategy to accelerate the deployment of new renewable projects, including wind, nuclear and solar, to contribute to 95% of the electricity generated and aimed at installing 70 GW of solar capacity by 2035.