This update was directly sent to clients of our Energy & Net Zero service. Our analysts cover a diverse range of topics to support public affairs and investment teams. Find out more about Energy & Net Zero, and speak to our experts here.
Last week, the UK set out the details of this year’s renewables auction, AR6. It looks set to deliver only 3-6 GW of offshore wind capacity, barring a policy change, materially less than was expected.
That puts the Conservatives and Labour’s 2030 offshore wind targets out of reach. A miss by four years or so can’t yet be ruled out.
Months before likely taking office, Labour finds its central climate pledge, 100% clean electricity by 2030, no longer reachable. The UK’s 2030 NDC is also increasingly becoming out of reach.
Whether this puts a 2035 date for clean power and whether it calls into question the broader pathway to net zero by 2050 partly depends on how big the miss on offshore wind turns out to be and whether the rollout of future sources of clean power goes as currently hoped. But the timelines already look challenging. We will return to the UK’s broader net zero strategy in due course.
Context
Last week, the UK set out the terms of AR6, this year’s renewables CfD auction, last Wednesday alongside the Budget. The annual CfD auction is the country’s main policy lever for delivering new renewables capacity. We discussed this and other climate announcements on the budget day.
The Government made much of its increased support for renewables in AR6 compared to previous CfD allocation rounds. But it was entirely silent on the implications for the country’s renewables targets.
AR6
First, let’s consider the details of AR6, particularly offshore wind.
To be clear, the UK’s annual CfD round supports different types of renewables. However, offshore wind gets the most attention, as it’s expected to form the backbone of future UK electricity production.
Permitting is much more straightforward for offshore wind than onshore wind or solar. In the UK, offshore wind is much more productive than onshore wind or solar. In 2022, it had a load factor of 41%, compared to 27% for onshore wind and 11% for solar.
On the day of the budget, the Government made much of the fact that it was providing record support for offshore wind. It set aside £1.025 billion (in 2011/12 prices) in support for renewables, three times the support in 2022 and four times the support in 2023.
Of that, £800 million a year (in 2011/12 prices) was put forward for offshore wind. In current prices, that translates to about £1.5 billion a year for renewables and £1.2 billion a year for offshore wind.
It’s now expected that AR6 will only produce another 3-6 GW of offshore wind capacity. Energy UK, the industry association, estimates a 3-5 GW range is likely. We’ve also seen 3-5 and 4-6 GW estimates.
Quite how much the auction will produce will depend on the strike price at which the auction clears. If it clears at the maximum possible price of £102/MWh (or £73/MWh in 2011-12 prices), only 3 GW will be produced. But if it clears at a discount of about 25% (the average discount in the first four CfD rounds), about 5 GW could be produced, and a discount of about a third might lead to as much as 6 GW being produced.
Either way, this is much less than the industry had expected. There was about 10 GW of capacity eligible to participate.
Implications of AR6
We won’t know the auction’s outcome until the auction results are published between 28 June and 4 September. But unless additional support is provided (which is not our base case), there will be several consequences.
First, the UK will miss its offshore wind targets. The Conservative Government has a target of 50 GW offshore wind capacity by 2030. Labour has a target of 55 GW by the same date.
These targets will be missed. The UK has about 15 GW operating and 14 GW in construction. Since it takes about five years to deliver a wind farm from the CfD contract to electricity production, the UK needed 21 GW to be delivered this year and next year’s allocation rounds to hit the target.
If we assume AR6 provides 3 to 6 GW, AR7 would have to produce 15 to 18 GW. And since that’s about three times what was achieved in AR3 and AR4 (5.5 GW and 4.2 GW) and is much larger than the total capacity eligible to bid this year, it’s not going to happen.
How much longer it takes for the UK to get to 50 GW comes down to guesswork. With very optimistic assumptions, the 50 GW target might only be missed by a year and the 55 GW target by a couple of years. However, with much more pessimistic assumptions, the 50 GW target might be missed by about four years and the 55 GW by about five years.
Second, the UK will miss its 2030 clean power targets. The Conservative Government wants 95% of the UK’s electricity to come from low-carbon sources by 2030. Labour wants 100% by then. We had already discussed how this target was essentially undeliverable.
When Labour first announced the target in September 2022, the target needed everything to go right. But in the year and a half since then, enough has happened to put it out of reach: Hinkley has been delayed, AR5 failed to deliver any new offshore wind, and AR6 looks set to disappoint, and slow progress on new grid capacity and CCUS requires heroic assumptions on future progress.
Third, the UK’s 2030 NDC and broader carbon reduction targets look even less credible. It’s not new that the UK’s 2030 target is in trouble. Last June, we discussed how the UK’s climate watchdog had pointed out that the UK would have to double the pace of its decarbonisation to hit the 2030 target or increase it eight-fold outside the power sector.
Nor is it news that while the current Government feels it has to say that the UK is committed to its 2030 and 2035 targets, in reality, it thinks the Johnson administration made the wrong call to commit to such ambitious plans. In any case, we can expect the Climate Change Committee’s annual progress report in June to be even more critical than last year’s.
In theory, it might be possible for onshore wind or solar to offset the delay in the UK’s rollout of offshore wind. On paper, the total generation capacity for each is very similar in the UK (onshore wind and solar each have a technical generation capacity of 16 GW, compared to about 15 GW for offshore wind).
In practice, that won’t be possible. Offshore wind has a much higher load factor. The main political parties’ onshore wind and solar targets stretch credulity. Labour wants 35 GW of onshore wind by 2030 (the Conservatives have no target).
The Conservatives want solar to increase five-fold to 75 GW by 2035. Labour wants solar power to triple to 50 GW by 2030. The planning process for both varies (as planning is a devolved matter in Scotland, Wales and Northern Ireland) but is more complicated and politically contentious.
Quite how big the consequences turn out to be of the UK missing its offshore wind targets will depend on things that we don’t yet know: how big the miss is, how much longer it takes to meet them, and how the rollouts go for other future sources of electricity – nuclear, CCUS, interconnectors, and so on.
But the UK’s basic strategy to get to net zero is to decarbonise electricity generation and shift society away from fossil fuels and onto clean electricity from the grid. A significant delay in the rollout of offshore wind, if it’s big enough and not offset by other clean electricity, calls into question the timing and sequencing of the broader strategy to net zero by 2050, not just the 2030 NDC target.
Next steps
Renewable developers will have a window from 27 March to 19 April to submit bids for AR6.
The auction results of AR6 will be announced between 28 June and 4 September.
In the event of a change of Government later this year, a Labour Government would need to set out the parameters for AR7 soon after taking office.
Conclusion
AR6 looks set to deliver only 3-6 GW of new offshore wind generation capacity. That effectively makes both parties’ 2030 targets for offshore wind unreachable.
The extent of the consequences will depend on how big the miss is and how the rollout of other low-carbon power sources goes over the second half of this decade. But if it’s a big miss (say by four years), and the rollout of other sources of low-carbon power is also delayed by a similar amount, that could put into question the UK’s broader trajectory to net zero by 2050. We will discuss the UK’s broader strategy towards net zero in the future.
Find out more about our Energy & Net Zero service and how it can support your strategy here.
