An offshore wind farm in Redcar, England. Developers are lining up for the UK's next renewables auction, which is seen as crucial in the country's pursuit of 50 GW of offshore wind installed by 2030.
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As offshore wind developers sharpen their pencils ahead of the UK's next renewable energy auction, industry observers said the underlying parameters will make it hard to fully make up for 2023's failed bidding round.
More than 10 GW of offshore wind projects are eligible for the sixth contract for difference (CFD) auction, including developments led by power giants RWE AG, Ørsted A/S and Iberdrola SA. The application window opens March 27, with bidding to take place sometime between June and August.
There is already a great deal at stake in Allocation Round 6 (AR6) after the preceding auction failed to muster a single offshore wind bid due to rising project costs, setting the UK back in its quest to reach 50 GW of offshore wind by 2030.
The government responded by raising the ceiling price for offshore wind in AR6 by 66% and quadrupling the available budget to £800 million per year.
While industry players said the changes acknowledge the new environment of higher costs, they noted that AR6 is still unlikely to deliver the volume of offshore wind necessary to get the UK back on track to achieve 50 GW.
Observers argue that the government's assumptions for capacity factors are too high and for power prices too low, meaning the budget is likely to be used up faster than it would with more realistic numbers.
"It seems strange as an industry that we need to ask for more than [£800 million]," said Damien Zachlod, managing director of EnBW Generation UK Ltd., a unit of German utility EnBW Energie Baden-Württemberg AG. "But the way the calculations work, it's sadly where we find ourselves."
The total budget for AR6 is £1.025 billion. Mature technologies like onshore wind and solar sit within "pot 1" and will compete for a budget of £120 million per year, while less established technologies in "pot 2" such as floating wind, geothermal and tidal energy have a budget of £105 million per year.
Offshore wind alone is in "pot 3" and has by far the largest share of the overall budget, having accounted for two-thirds of the more than 30 GW of projects awarded CFDs since 2014.
Projects piling up
Estimates for how much capacity the AR6 offshore wind budget could support vary depending on the eventual strike price.
Contracts awarded at the bid ceiling of £73/MWh in 2012 prices would usher in just 3.1 GW, according to the Offshore Renewable Energy Catapult, a UK-based innovation and research center. Meanwhile, 4.2 GW could be awarded at £60/MWh and 5.8 GW at £50/MWh, the organization said.
Even 5.8 GW is "quite far away from the level of eligible projects," Zachlod said in an interview. "With [Allocation Round 5] AR5 failing, we now have two years' worth of projects … piling up ready to bid."
Indeed, the roster of bidders includes nearly 5 GW of offshore wind projects that were thought to compete in 2023's auction only for them to opt out due to the inflationary environment.
The pipeline has since been bolstered by Ørsted's 2.6-GW Hornsea 4 wind farm and RWE's 1.1-GW Awel y Môr. It could grow larger still if SSE PLC gains planning consent for its giant 4-GW Berwick Bank development in time.
Meanwhile, certain projects awarded contracts in the fourth CFD auction in 2022 may look to make use of the flexibility to reduce their awarded capacity by up to 25% and rebid that share into AR6 in the hope of achieving a higher price.
Allocation Round 4 (AR4) offshore wind contracts were awarded at £37.35/MWh in 2012 prices — a level that Swedish utility Vattenfall AB last year deemed unworkable in the rising cost environment, leading it to suspend development of its 1.4-GW Norfolk Boreas project.
Ørsted's 2.9-GW Hornsea 3 project was awarded a CFD at the same price as Norfolk Boreas in AR4, and the Danish wind developer has already said it will reenter a portion into AR6.
"The economics of offshore wind are in a tough space so all things being equal the projects will need quite high clearing prices to be profitable," said Alon Carmel, renewable energy expert at PA Consulting. "It's possible that you could get somewhere between 6 GW to 8 GW ... but it feels quite challenging ... given what we've seen with cost inflation."
'Fierce competition'
The prospect of AR6 coming up short is down to the government's underlying assumptions for the auction.
For one, it assumes an offshore wind capacity factor of 61%, a rate of production efficiency that industry players said is much higher than what is seen in the real world.
The average capacity factor for UK offshore wind farms between 2018 and 2022 was 40.58%, according to trade group RenewableUK, though newer projects with bigger turbines can surpass 50%.
The government is "using quite conservative assumptions," Carmel said in an interview. "Show me an offshore wind farm that has achieved a 61% capacity factor."
The future power price assumptions for AR6 are also seen as unrealistic. For 2030/2031, the government's offshore wind reference price is £24.13/MWh in 2012 prices, lower than most industry forecasts.
Jonathan Cole, CEO of Macquarie Group Ltd.-backed developer Corio Generation Ltd., said the current AR6 framework "risks deploying far less offshore wind capacity than is required," but added that there is "still time to adjust the final budget and parameters" of the auction.
Either way, the industry is expecting a competitive bidding round and a result that will leave some developers disappointed. At the same time, observers warned against a repeat of AR4, where prices fell to levels that were ultimately unviable for some.
"There are a lot of projects that need a CFD to get going and that will mean quite fierce competition," Carmel said.
Offtake strategies
The failure of AR5 left the UK needing to almost double its secured offshore wind pipeline to reach 50 GW by 2030, with at least 8 GW needing to be procured annually over the next three CFD auctions to 2026, according to industry estimates.
The rush to get capacity installed has led some developers to consider hybrid offtake strategies that combine CFDs with corporate power purchase agreements (PPAs). The 882-MW Moray West project, developed by Engie SA and EDP Renováveis SA, was awarded a CFD in AR4 for one-third of its total capacity, signing PPAs with tech giants Amazon.com Inc. and Google LLC for the rest.
"There are a lot of projects considering this route to market," Zachlod said. "The challenge right now is finding enough offtake for the amount of offshore wind that's out there."
EnBW does not have a horse in the race for AR6 but is developing Morgan and Mona, two 1.5-GW projects in the Irish Sea, alongside oil major BP PLC. The projects may be eligible to bid in Allocation Round 7 (AR7) in 2025. Zachlod said the companies are also considering other revenue strategies.
Those that miss out on contracts in AR6 could be joined in AR7 by several other large projects that receive planning consent over the next year. With 2030 getting closer, that may make next year's auction the most competitive yet.
"There could be a record amount of volume eligible to go in," Zachlod said about AR7. "If you want it installed by 2030, it needs a CFD by next year at the latest I would say."