The UK has raised the maximum prices available for offshore wind by 66% in next year’s CfD auction. Here, we look at the details of the announcements and what they mean for the UK’s clean energy targets.
This content was originally published for clients. Find out more about our Energy & Net Zero services.
Key takeaways
The UK Government increased the maximum strike prices for offshore wind projects in next year’s CfD auctions to £100 (€115) per megawatt hour, in current price. There were also big increases in the maximum strike prices for other renewable technologies, and the UK is consulting on providing further support in the 2025 auction for offshore projects that deliver additional economic, social and environmental benefits.
The news is positive for the sector and the credibility of the UK’s 2030 offshore wind targets. The country needs to deliver record-breaking auctions in both 2024 and 2025 if it is to have any chance of hitting these targets. However, the UK has yet to set out how much offshore wind capacity it intends to allocate next year.
However, £100/MWh is roughly in line with current wholesale prices and well above prevailing prices before the energy price crisis. Higher costs and extensive grid infrastructure rollout will put pressure on public support for renewables and on the willingness of centre-right parties to maintain a supportive policy framework.
Context
The UK Government said that it would raise the maximum price for offshore wind projects bidding in next year’s contracts for differences (CfD) auction, Allocation Round 6 (AR6). CfDs are the UK’s main lever for delivering new renewable capacity.
The administrative strike price (ASP), or maximum strike price, was increased by 66%, from £44/MWh to £74/MWh in 2012 prices (or from £60/MWh to £100/MWh in September 2023 prices).
The UK Government also hiked up the maximum bid prices for other renewables, compared to this year’s allocation round: by 52% for floating offshore wind (from £116/MWh to £176/MWh, in 2012 prices), by 32% for geothermal (from £119/MWh to £157/MWh), by 30% for solar (from £47/MWh to £61/MWh) and by 29% for tidal (from £202/MWh to £261/MWh).
The UK Government also launched a consultation on incorporating “sustainable industry rewards” into the 2025 auction, AR7. These could provide additional revenue support for projects that increase offshore wind deployment projects’ economic, environmental and social sustainability. The Government suggested this could be done by investing in high-skilled jobs, using more environmentally friendly factories to assemble components, finding new ways to cut emissions, and investing in new facilities or skills in deprived areas.
The UK Government also published a plethora of documents after the announcement, including the draft allocation framework for AR6, a methodology note on setting the ASP for AR6, the consultation on sustainability industry rewards, and reviews on the cost assumptions for floating offshore wind and tidal stream energy.
The repricing was in line with briefings to the press last week and with our prior expectations that the UK would allow the strike price to re-rate upward to a level that made CfD bids viable following the failure of this year’s auction to attract any bids for offshore wind. The new auction parameters are consistent with that, with BNEF’s range 2027 LCOE range at £40-£70/MWh and JPMorgan estimating a range of £60-£100/MWh.
UK offshore wind targets
If the UK is to stand a chance at meeting its 2030 offshore wind targets, it cannot afford another failed auction next year.
As a reminder, the Conservatives and Labour have committed to the UK having 50 GW of installed offshore generation capacity by 2030. The country has about 14 GW. Offshore wind is expected to form the backbone of the UK’s future clean generation capacity, meaning that it’s particularly important to the Government’s target of delivering electricity entirely from low-carbon sources by 2035 (which Labour want to bring forward to 2030) and to its broader emission targets.
To hit the 2030 target, the following two CfD auctions in 2024 and 2025 must deliver 23-24 GW of offshore wind capacity. That will require record-breaking auctions: the biggest CfD round for offshore wind to date was last year’s AR4, which delivered 7GW.
At the time of writing, the UK Government has not set out how much capacity it intends to auction next year. Several projects were eligible to bid into last year’s auction rounds and could bid this coming year, like East Anglia 1 North and East Anglia 2, Norfolk Vanguard and Seagreen. The Government may want to understand better whether projects like Hornsea 3 or Berwick Bank could also participate in next year’s auction before setting the auction size.
Implications
Following years of continually falling costs, prices rose substantially due to higher inflation, interest rates and supply chain constraints. The UK failed to secure any offshore wind capacity this year because it refused to adjust the maximum strike prices despite a 40% increase in offshore wind costs over the previous year, primarily due to higher inflation.
Last week’s announcement sets prices that should allow bids. Of course, the Government will also be hoping that competitive tension will push down the clearing price – in previous allocation rounds, the actual strike price has been 16-39% lower than the maximum strike price.
But before describing the announcements as an unambiguous success for the Government, we will have to see how much capacity the Government eventually thinks it will be able to deliver.
To date, low costs have been one of the main arguments that politicians in the UK and elsewhere have justified the rollout of clean electricity (and the accompanying grid infrastructure) to their electorates. Making that argument could become materially more complicated in the future – an ASP of £100/MWh in current prices is roughly in line with current wholesale prices, but it is well above the circa £50-£70/MWh cost of electricity in the years before the energy price crisis.
Next steps
Tomorrow, the UK Government will publish its autumn statement, setting out the broader fiscal context of its energy and climate policy.
The UK Government last week said that it would publish a Connections Action Plan by the end of 2023 to reform the connection process and reduce connection timetables.
Bids for next year’s AR6 will be submitted between June and August 2024, with the results announced between July and September, likely shortly before the UK’s next General Election (which we currently expect in November 2024). AR7 will take place after that, in 2025.
Conclusion
The announcements were positive for the sector and the credibility of the UK’s offshore wind targets.
However, they also herald the start of a more difficult task for politicians looking to keep public support for renewables. Rising costs and extensive grid infrastructure rollouts will likely put pressure on the support of right-of-centre parties for renewables in the years ahead.
Forefront Advisers’ Energy & Net Zero service unpacks the political dynamic and regulatory plans in energy, carbon pricing, CCUS, critical raw materials and net zero manufacturing. It covers global, EU, UK and national initiatives and connects the dots between them. See how it can support you.
