What Orsted’s decision to drop Hornsea 4 mega project means for the UK’s offshore wind plans

The UK government needs to have “a serious conversation” to address the issues that have persuaded two offshore wind developers to pull the plug on huge, contracted projects but it can still get the country back on course to meet its clean energy targets, analysts have suggested.

Hornsea 4 represented the lion's share of the 5.3GW of fixed-bottom offshore wind capacity awarded at that auction and its cancellation strikes a blow to the UK government ambitions of achieving a virtually carbon free electricity grid by 2030.

“I think it was many people's assumption that the higher strike prices achieved in AR6, would be sufficient to see projects go forward but it appears this was not the case with Hornsea 4,” said Leo Bertels, associate director of BVG Associates.

More to follow?

The sense of surprise was heightened by the fact that Hornsea 4 faces none of the grid connection risks that worry many offshore wind developers in Scotland, and it is located close to big centres of electricity consumption in the southeast of England.

“This is worrying for the UK government because if Hornsea 4 can't make the numbers add up, then obviously the next question would be if other projects are going to follow,” Bertels added.

Other projects allocated in AR6 include Scottish Power's East Anglia 2 and also the Inch Cape array, owned by China's Red Rock Renewables and Ireland’s ESB.

“Capacity that we thought was banked is not so certain. It is starting to look like something is wrong. I think the UK government needs to have a very serious conversation with the sector about why we are seeing projects pulling out of CfDs,” said Bertel.

He suggested the UK might need to think about broadening its current indexation mechanism to offer protection against rising capital and commodities cost, not just consumer price inflation.

The government is aiming to install between 43-50GW of offshore wind by 2030, having recently slashed its previous 60GW target in line with what it believes it needs as part of its Clean Power 2030 Action Plan.

“With Hornsea 4 paused, naturally, there's an even larger gap to fill by 2030,” said Scott Urquhart, CEO of Danish offshore wind intelligence firm Aegir Insights. “This puts even more pressure on the upcoming CfD allocation rounds this summer and next year.”

New levers

The UK government is in the process of introducing a package of changes to the CfD mechanism in time for the now critical AR7 auction expected later this year.

“This announcement could push them in that direction to make sure to have enough eligible capacity to keep some level of competition in this summer's AR7.”

Another change that could help the government boost allocation is the switch from budgetary to capacity parameters.

The new rules include a provision that will allow energy secretary Ed Miliband to "peep" at anonymised bidding information before setting final budgets.

The measure is intended to allow budgetary flexibility — for example, if a wind farm in line for allocation would take the auction past its overall ceiling — but it could be used more aggressively.

“The government could opt to take up a higher volume than would have been the case prior to the Orsted decision,” noted Adam Bell, director of policy at consultancy Stonehaven.

Not a Vattenfall moment

Some saw Orsted's decision as esssentially a move to repair the company's balance sheet after a painful experience in the US.

“This was not the same kind of warning signal as Vattenfall's cancelled project from AR4. That one really demonstrated that the economics had moved massively,” said John MacAskill, director of renewables consultancy firm OWC. “I think it is essentially a business decision by Orsted and it does not necessarily mean that the project cannot be built.”

Orsted is barred from rebidding in AR7 but a UK government spokesperson said work will continue to get Hornsea 4 back on track.

“There are still very good future prospects for the Hornsea 4 project as it is prime offshore wind real estate in the UK which will be competitive in future rounds once it is eligible again,” Urquhart noted. “They clearly want to retain the option. They're retaining the site and retaining the connection.”

But attracting enough bids to make AR7 a success also depends on how developers react to other changes such as the introduction of new planning rules and a clean industry bonus scheme that offers incentives for local content, as well as some penalties.

While the broad thrust of many of the changes is welcomed, some developers say they are being asked to take on too much too quickly if the UK wants to stick to its ambitious capacity timelines.

“What worries me about the CIB scheme is that we've ended up with a complicated process that won't deliver the outcomes the government want. We've put a lot of time and effort into this and we've struggled to make this work not just for us, but for our supply chain,” Lane said.

“It concerns me that introducing this new policy framework has really pushed back the opening of the CfD auction.

“We're now likely to be bidding not in the summer as we did last year, but in November time and given that the government has Clean Power 2030 to deliver, delaying CFD auctions is not what's going to get us there,” she added.

MacAskill was upbeat, arguing that the UK's emerging policy framework should be seen as a welcome effort to bring a more “joined up and less fragmented” approach to the sector, especially when it comes to ports and supply chains.

Jane Cooper, deputy CEO of industry association RenewableUK offered her advice. “We urge the government to remove uncertainty for investors in this year’s auction for new clean power projects by ensuring auction parameters reflect the cost increases we’re seeing in the supply chain and inflationary pressures.

"Additionally, government should rule out the introduction of zonal pricing which would drive the cost of investment up even further,” she said.

Bell also thought the Hornsea 4 decision was not necessarily reflective of a broader market trend.

“I think the government essentially just needs to assure the market that nothing has changed. There is still a lot of potential to invest in offshore wind in the UK and the Hornsey 4," he said.