'Past wrongs and bad luck' meant giant UK offshore wind round still fell short

The latest UK renewables auction was a welcome return to form for offshore wind but a need to “right past wrongs” and simple bad luck meant it fell short of what the government may have hoped for, pushing 2030 targets further out of reach, say analysts.

There had been huge pressure on this year’s contracts-for-difference (CfD) auction, known as AR6, to succeed after no offshore wind developers bid in last year’s calamitous edition due to the unsustainably low power price on offer.

A figure approaching that would have breathed new life into the new Labour government’s incredibly ambitious target of having 60GW of offshore wind, including 5GW of floating wind, up and running in UK waters by 2030, up from 15.5GW now.

Another 1.6GW of contracts went to projects that had come through the AR4 round in 2022 but – battered by economic headwinds – re-bid in this edition to get a better price for their power.

For ScottishPower CEO Keith Anderson, the results showed the offshore wind industry is “back on track.” But Tom Glover, UK head of RWE, which had several gigawatts of projects eligible to bid, lamented that the round “only procured around 35% of the total eligible pipeline.”

If the government wants to hit its 2030 target, Glover said it will need to significantly ramp up procurement,” calling for it to “urgently review and confirm the parameters for next year’s auction.”

AR4 projects eat into AR6 budget

All the other projects that came through AR4 took up this offer, winning a new strike price of £54.23/MWh.

The ‘permitted reduction’ scheme, as it is known, was an “important insurance mechanism” to ensure that projects can keep progressing even when there are “external shocks,” such as the war in Ukraine, said Luke Clark, director of industrial growth at RenewableUK.

It did, however, eat up a £251m share of the AR6 budget, said Bertels. A further £230m of the budget, or 21%, went unspent, most likely due to the next cheapest project available being “too large to fit within the allocated pot budget.”

“This is probably more a case of bad luck than bad planning, but both industry and government would have preferred to see the budget fully utilised to drive forward as much deployment as possible.”

All in all, that means that only around 56% of the available budget was actually spent on new fixed-bottom projects.

‘Government would have hoped for better result’

The challenge to get to 55GW of fixed-bottom capacity by 2030 was already “incredibly ambitious,” said Sam Hollister, head of energy economics at LCP Delta.

“There is no doubt that to get nearer that landmark, the government would have been hoping for more offshore projects this time around,” he said, stressing there were still a record 131 renewables projects procured across the entire auction.

“Next year will be interesting, as we can expect to see some onshore wind projects in England coming forward given the recent lifting of the ban, and if there is a sizeable offshore wind budget, then we can certainly expect to see levels similar to AR4”.

Peter Lloyd Williams, senior analyst at Westwood Global Energy Group, said that AR6 was a “mixed bag for offshore wind.”

It is he said interesting that the top strike price for offshore wind in this round, £58.87/MWh, was “‘only’ 34% higher than the much-lamented strike price” in AR5 last year that resulted in a developer no-show.

It was also “someway below the maximum” of £73/MWh, “which only serves to highlight the extent to which AR5 was a lost opportunity.”

That “19% discount” on the ASP “highlights the competitiveness of the auction round, with high levels of participation from developers,” said Aurora Energy analyst Pranav Menon.

“This was largely expected, given the large pipeline of projects eligible to participate in the auction round and the high ASP, which offered lucrative returns.”

“Ultimately, such competitive price discovery is exactly what you like to see in a CfD auction, as it ensures that low-carbon capacity is delivered while also minimising the cost to consumers.”

‘Reforms needed’ to auction design

Menon believes it is now "highly unlikely" the 2030 target will be met, with analysts estimating the government is only around halfway to procuring the 60GW of capacity it is targeting through its CfD process.

Challenges go "beyond just financing," he said, with "stretched supply chains and limited port infrastructure" other key limitations.

Signe Tellier Christensen, an analyst for Aegir Insights, added: "While this round succeeded in terms of multiple gigawatts awarded... this is not a sufficient result to be on track for the UK government’s 2030 target. Of the 4.9GW fixed-bottom projects awarded, around 30% of the capacity were projects rebidding. So, the UK still has a back-log of shovel ready projects waiting on offtake."

Frankie Mayo, UK policy chief at climate think tank Ember, believes government targets “remain in sight, especially as many CfD upgrades are being discussed such as big budgets or more regular auctions.”

According to target commissioning data, he said the projects from this round hope to come online in 2028 and 2029, meaning that “potentially the next two auctions” could support projects for delivery by 2030.

He argued however that “larger reforms” are needed, with the competitive CfD structure meaning the UK is “struggling to achieve the scale required”.

Instead of encouraging developers to bid against each other for a limited pot of money, he said the government should outline a reasonable price for power and “encourage as many projects as possible” to come forward and apply, “rather than creating losers through the current bidding process.”