The U.K. handed contracts to nearly 11 GW of new renewable energy projects, with its latest auction delivering low-cost clean power capacity that government officials said would help protect the country from high and volatile gas prices.

The fourth round of the government's contracts for difference, or CFD, program was dominated by wind and solar. Almost 7 GW of offshore wind was successful, including giant projects being developed by Ørsted A/S, Vattenfall AB and Iberdrola SA, along with nearly 1.5 GW of onshore wind and 2.2 GW of solar. The three previous CFD auction rounds secured 11.26 GW combined.

The new projects will benefit from 15-year fixed-price contracts with the government — the cheapest of which went to offshore wind, at £37.35/MWh in 2012 currency or about £45.03/MWh in today's money using government calculations for inflation.

"Eye-watering gas prices are hitting consumers across Europe," Business and Energy Secretary Kwasi Kwarteng said in a July 7 statement. "The more cheap, clean power we generate within our own borders, the better protected we will be from volatile gas prices that are pushing up bills."

WindEurope CEO Giles Dickson said the auction outcome "cements the U.K.'s position as a global leader in renewables."

"The strong competition and competitive prices also show the U.K. has the right basic auction design with CfDs," Dickson said in a statement. "And they've shown again how cheap CFDs are for governments — because they get paid back as well as paying out."

Sustainable prices?

Industry group RenewableUK said the new renewables projects will save British consumers £58 per year compared to the cost of gas-fired power generation, adding that the price of offshore wind is significantly cheaper than the cost of U.K. electricity today, which has been trading at more than £150/MWh for much of 2022.

Offshore wind prices are lower than those from the third CFD round in 2019 — despite today's inflationary environment — and represent a dramatic cost reduction compared to the £150/MWh contracts handed to projects in 2014.

That said, the rate of cost reduction is slowing. Offshore wind prices came down £18/MWh in the 2019 auction, while the latest result is only a £2.30/MWh decrease since then. The slowdown is partly due to a surge in the cost of equipment like turbines, driven by a tripling in global steel prices, according to Alon Carmel, offshore wind expert at PA Consulting, who advised one of the offshore wind winners.

"It's not just commodity prices, but also financing cost," Carmel said in an interview, with rising interest rates set to bump up the cost of bankrolling new projects. Bids are underpinned by assumptions about the future, which are now more difficult to make. "The modeling for bid prices was more complex this year than normal," the adviser added.

Given the upward pressure on capital expenditures, many in the sector see margins for new projects under threat. "Price reductions seem to be stabilizing, which would be a good thing for the industry," Carmel said. "Are these kinds of prices sustainable? Essentially, we'll have to wait and see."

More broadly, the uncertain macroeconomic environment adds an extra layer of risk around project delivery and should not be ignored, according to Gareth Miller, CEO of market advisory firm Cornwall Insight.

"This is the first CFD auction undertaken against the backdrop of a potential economic downturn, with consequential possible impacts on costs of financing as risk of general malaise flow into funding markets," Miller said in a post on LinkedIn.

'Thriving industry'

The auction's largest single CFD contact went to Ørsted for its 2,852-MW Hornsea 3 wind farm off England's east coast. Once operational in 2027, it will take Ørsted's Hornsea zone — which also includes the CFD-backed Hornsea 1 and Hornsea 2 projects — to more than 5 GW.

Onshore wind and solar competed in an auction for the first time since 2015, having been excluded from CFD rounds two and three due to their status as mature technologies.

The onshore wind capacity awarded includes nearly 600 MW of projects on remote islands, for which contract prices are slightly higher than traditional onshore wind due to their higher transmission costs. The largest such project is SSE PLC's 443-MW Viking wind farm in the Shetlands Islands, Scotland, which SSE Renewables Ltd. Managing Director Stephen Wheeler described as "the most productive onshore wind farm in the U.K." based on expected annual output.

Beyond traditional renewables, nascent green technologies also secured contracts, including 32 MW of floating offshore wind and 41 MW of tidal stream projects.

The U.K. has typically run CFD auctions every two years but intends to hold annual auctions from March 2023. The government recently raised its 2030 offshore wind target by an additional 10 GW, to 50 GW, and is targeting a fully decarbonized electricity grid by 2035.

With a more frequent auction schedule, delivering the project pipeline will be challenging in light of supply chain issues and staff shortages. "There will no doubt be bottlenecks and delays," Carmel said. "But I think the industry will rise to the challenge."

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