Funding the UK’s offshore wind ambitions

Lloyds Bank head of power and utilities Seung-Yun Oxley discusses the role of finance in helping to achieve the UK’s wind ambitions after prime minster Boris Johnson pledged to power every home across Britain using electricity from offshore windfarms during the Conservative party’s online conference last month.

Amid the doom and gloom brought about by the resurgence of Covid-19 this autumn, there continues to be indications that the ongoing pandemic will stimulate at least some positive change in how we approach the world in the future.

Chief among these is the commitment to accelerate the journey towards the UK’s 2050 net zero emissions objectives. ‘Building back greener’ is how the government has summarised it so it was perhaps no surprise that Boris Johnson had renewable energy in mind when delivering his Conservative party conference speech last month.

Most notable among his address was the pledge that offshore wind will power every home in the UK by 2030. This was backed by the announcement of £160 million to upgrade ports and factories with a view to building more wind turbines, further cementing the UK’s status as the largest offshore wind producer in the world.

The commitments form the early stages of a ten-point plan for a green revolution which the government is expected to set out before the end of the year. While we await those details, it’s worth assessing whether these initial ambitions represent deliverable targets.

To put it into context, 37.1 per cent of the UK’s power was provided by renewable energy sources in 2019.  That figure has increased in 2020, particularly due to demand on the network falling during lockdown, with renewables responsible for 47 per cent of UK electricity generation in Q1 and 44.6 per cent in Q2.  For example, the UK went a record 67 days without using coal-fired generation between April and June, as favourable weather conditions supported a boom in solar-led production.

As economic activity returns in the long-term, it is offshore wind that will play the most important role in sustainable generation. And, if the UK is to improve capacity from 30GW to 40GW by 2030 as planned, significant investment will be needed – not just in terms of new wind farms, but also in the capacity and technology behind energy storage to ensure the benefits are captured when a fair wind blows.

All of this will require funding on a grand scale at a time of economic upheaval. Naturally, funding models will require a great deal of long term and continued commitment from all stakeholders, including politicians. This type of thinking was exactly what was in mind when the Contracts for Difference (CfD) scheme was introduced to support offshore wind electricity generation in 2015 in the first auction. The scheme, which ensures developers are paid a flat rate for the electricity they produce over 15 years, has gone a long way to stimulating the market.

Lloyds Bank is one institution which has captured that stimulus. Supported by our Clean Growth Financing Initiative, to date we have provided funding to power over six million homes via renewable energy, including six offshore wind farms that employ the CfD scheme.

However, as mentioned previously, the world has moved on significantly since 2015 and we are now entering a period in which government subsidies may be less forthcoming. Even prior to the pandemic, the third CfD allocation round had cut the flat rate that developers could expect to receive by around two-thirds (£39.65-41.61/MWh) from the initial £114-120 per megawatt-hour offered in 2015.

The CfD regime has now become a price stabilisation mechanism rather than a ‘subsidy’.

For example, Lloyds Bank has worked with SSE and Total to support phase one of the new £3 billion  Seagreen offshore development, which will become Scotland’s largest offshore wind farm. The Seagreen transaction is the first partially subsidised offshore wind project to be financed in the UK, as the sector moves away from its dependency on government subsidies.

Approximately 40 per cent of the Seagreen turbines will benefit from a fixed power price through the CfD scheme. Despite a challenging macroeconomic environment, twelve banks supported the project – closing the financing in June with a total debt package of around £1.4 billion including term debt and ancillary facilities. The deal was oversubscribed, showing the continued commitment of banks and investors in the UK renewables space.

Export credit agencies are also heavily involved in the market – particularly those associated with Scandinavian governments. They have widened the liquidity pool, providing long-term funding options for developers. It will be hoped that their support sustains over the next decade and beyond.

As such, in the medium term, large investment-grade corporates will continue to be called upon to anchor new developments through extensive power purchase agreements. We will also see some of the oil supermajors accelerate their move away from fossil fuel extraction and increase their interest in greener investment opportunities. Shell, for example, aims to reduce the net carbon footprint of the energy products it sells by 65 per cent by 2050; and BP has the ambition to become net zero by 2050.

Undoubtedly, we in the banking industry will continue to play our part in helping the UK to reach its wind objectives by 2030. Wind energy is a critical investment for the future of the UK and the economy, and we will continue to work with industry to facilitate the UK’s transition to a lower carbon future.