Accelerating the UK's Offshore Wind Growth through Subsidy-Negative Projects

According to Guidehouse Insights' report, Global Wind Energy Database 2Q20, 2020 was a record year for offshore wind with 7.0 GW installed globally. The UK has proven itself as a leader in offshore wind growth: the nation’s capacity saw an addition of 1.76 GW in 2020, and capacity is expected to grow at a compound annual growth rate of 6.7% until 2028. The UK government has pledged to produce 30% of the UK’s energy needs from offshore wind by 2030, with an ambitious target of 40 GW of installed capacity by 2030.

The levelized cost of energy of offshore wind has been rapidly declining in recent years as technology improves, with higher capacity turbines, larger rotor diameters, and the ability to build turbines further from shore. Recent analysis by a team of Imperial College London researchers concluded that the cost of offshore wind has dropped enough to reduce residential energy bills in the UK, aided by market-oriented competitive pricing policies.

CfDs Can Help the UK with Its Offshore Wind Goals

Since 2013, new UK renewable energy projects have been supported by contracts for differences (CfDs). In the CfD model, fixed prices (strike rates) for electricity generation are agreed upon for a set period (typically 15 years) in tender procedures. The strike rate determines the shortfall and excess for the operator. At the third CfD allocation round in 2019, strike prices for new offshore wind projects were secured significantly beneath the wholesale electricity price at a low of £39.65 ($52) per MWh. The Imperial College London team compared this record-breaking strike price to projected UK wholesale prices over the next few decades. In doing so, they found that offshore wind farms built in the mid-2020s will most likely remain subsidy-negative over their entire lifetime, with a strike price below the forecast wholesale price of £58 ($76) per MWh. Not only does this mean that new offshore wind projects will cost the government virtually nothing but also this negative subsidy is desirable to consumers, as the payback translates to decreased energy bills.

This new normal raises questions about who the winners and losers are under CfDs. A highly competitive market means that smaller developers unable to outbid prices will inevitably be pushed out. UK offshore wind prices have been driven low enough by competitors that some developers may choose to sell projects on a merchant basis rather than participate in future contract auctions. In addition, growing amounts of offshore wind could drive the overall wholesale market price down on windy days—potentially below strike prices, meaning that future offshore projects cannot be guaranteed zero-subsidy. However, CfDs are more attractive to investors than merchant projects, as they significantly reduce the risk of investment in intermittent offshore wind. Because of this aspect, quasi-merchant projects (a hybrid of CfDs and private investment) may grow in popularity in coming years. Regardless, CfDs will continue to play an integral role in achieving the UK’s offshore wind target, and serve as a win to the government, consumers, and developers able to compete.