Britain’s offshore wind success: The new energy reality

Britain's offshore wind industry has come of age at a startling rate and presents new market dynamics for the sector.

Its political issues are well-documented and seemingly never-ending, but when it comes to offshore wind, Britannia still rules the waves.

That position was cemented last week when the UK government awarded 5.5GW of new offshore wind capacity in its Contract for Difference auction at a record-low delivery price of £39.65 ($49.15; €44.67) per MWh – below the wholesale market price for electricity, and thus, for the first time ever, ensuring UK offshore wind sites will be delivered unsubsidised.

If, as trade body RenewableUK said two years ago, the previous record-low awarded strike price of £57.50 was “astounding”, then last week’s price – a 30 percent reduction in two years – represents a new frontier for a sector that has attracted the interest of the world’s leading energy and infrastructure players.

Germany and the Netherlands will counter Britain’s triumph with claims of having already secured subsidy-free bids for offshore wind, but in addition to Britain’s results also including grid connection costs, it has furthermore been praised for its scale and stability.

“[The UK has] the largest auction plans: 2GW a year to 2030,” noted Giles Dickson, chief executive of trade body WindEurope, in a statement following the results. “They’ve the best auction model, the two-sided Contract for Difference: requiring wind farms to pay back the difference when the market electricity power exceeds the guaranteed price [thus delivering] the lowest overall societal costs. Other European countries should take careful note as they finalise their offshore wind plans as part of their 2030 National Energy & Climate Plans.”

Comparisons will inevitably be made with the £92.50 per MWh that the Hinkley Point C nuclear station will receive when it eventually goes online, although those four numbers hold nearly as much notoriety in Britain as the 52:48 referendum result and should not be used as a yardstick for what represents a good energy price in the UK in 2019.

However, the results must surely add another element to the UK government’s ongoing consultation around the use of the Regulated Asset Base model for new nuclear sites – a model that works great for investors but less so for consumers, who can now point to subsidy-free offshore wind as a viable and reliable energy source. Of course, there is a need for baseload power but the government needs to seriously consider whether what it is proposing is truly the answer to the question.

The rapid fall in costs for offshore wind also slightly distorts a market for infrastructure investors looking to purchase stakes in projects. The first CfD round for offshore wind in 2015 delivered a lowest price of £114 per MWh. It certainly wasn’t cheap at the time but was intended to propel an industry that was still in its relative infancy. Just four years later, it seems almost unfathomable that generators could be paid such a price when the industry just delivered £39.65 in 2019. The secondary market in two to three years’ time will be presenting opportunities with strike prices ranging from nearly £120 per MWh to £40 per MWh, without a great deal of delivery time between them.

Macquarie’s Green Investment Group, a pioneer in the UK offshore wind industry under its guise as the Green Investment Bank, was one of the most recent investors to take advantage of this element of the market, last month buying 40 percent of the 714MW East Anglia One offshore wind site from Iberdrola, a beneficiary of the 2015 auction with a £119 per MWh strike price. Today’s price will certainly pale in comparison to that, as well as to the £140 per MWh earned by the Hornsea One site owned by Orsted and Global Infrastructure Partners.

The latest developments could well see the UK offshore wind market come to suit a different profile of investor as a result. Successful developers SSE, Equinor and Innogy will have a little bit of time to test out this theory, with the earliest delivery dates for the new projects being 2023-2024.

What is clear is that offshore wind has certainly heeded the warning from then-energy secretary Amber Rudd in 2015 that renewable technologies must “stand on their own two feet” and shift away from “permanent subsidy reliance”.