High offshore wind strike price consequence of AR5 failure

The government could have avoided setting such a high offshore wind strike price for its upcoming contracts for difference (CfD) auction if it had heeded industry warnings during the last round, energy analysts have suggested.

It comes after the government announced a 66% increase in the offshore wind administrative strike price cap for the next CfD auction.

The administrative strike price – the maximum amount generators will be paid per megawatt hour (MWh) – has increased from £44 to £73 (2012 prices). It follows a disappointing auction round this year, which attracted no bids from offshore wind developers.

Aurora senior associate Ashutosh Padelkar told Utility Week that the lofty strike price cap for the next auction indicates that there is a “desperation” to attract offshore wind developers back to the table.

He added that if the cap had been set at £55 or £60 during the last auction round (AR5) then it “is more than likely” that the government would have set a lower strike price cap for the upcoming round (AR6).

“We know that having AR5 set at £55 or £60 would have been enough to attract bids in the region of 4GW which was ready to go,” Padelkar said. “If that had been done then I think that it is more than likely that the price would have been around the same, maybe a slight increase to £65, this time around.

“The government needs to make up for the last auction and needs to be sure it will secure extra capacity this time around, and that is why the cap has been set much higher.”

He added: “Projects could absolutely have been secured at a lower price at the last auction if government had adjusted the price beforehand. But that horse has bolted now for AR5 and it is very encouraging to see that the government has listened to developers and the strike price increased for the next round.”

Padelkar added that setting the cap at £73 raises the possibility of “true price competition” at the next auction.

“It is important to remember that the £73 is the cap. Developers could come in lower and outbid one another which will create price competition which is a great thing,” he added.

Padelkar said that the strike price is “just one piece of the puzzle” adding that the budget allocated to the next auction is “perhaps more important”.

The budget will be set on 13 March 2024, according to the government’s indicative AR6 timeline. Funding for offshore wind has been separated into its own pot – something Padelkar said “will make a big difference as it won’t have to compete for funding with other technologies”.

He added: “It is good that they have put offshore wind in its own funding pot. The question now is how much are they going to put in that pot.

“If it is still a low amount then some projects risk missing out on funding even though they are ready to go.”

Padelkar added that the budget is likely to be determined by the number of projects which are in a position to bid come next March.

He said that 4GW of capacity was “ready to go” in AR5, with 2GW worth of projects securing planning permission since AR5 concluded.

By March he said this could be significantly higher with major projects – such as the 4.1GW Berwick Bank scheme – currently awaiting a decision on their development consent applications.

Regen energy market analyst Becky Fowell agrees that the success of AR6 is completely dependent on the size of the budget.

“The strike price is a welcomed and significant increase, which is at the upper end of what industry was hoping for,” Fowell told Utility Week. “It is a really positive first step but it now all comes down to the budget.”

Fowell also welcomed the government’s decision to consult on the introduction of Sustainable Industry Rewards, which could be incorporated into the AR7 auction process.

This would be for offshore wind and floating offshore wind companies and would mean additional payments if they reduce the carbon emissions in their supply chains, or if they improve their social benefit.

The government is also increasing maximum bid prices for other technologies. These include:

• Geothermal by 32% – from £119/MWh to £157/MWh
• Solar by 30% – from £47/MWh to £61/MWh
• Tidal by 29% – from £202/MWh to £261/MWh

Chris Hewett, chief executive of Solar Energy UK, highlighted the positive impact of the CfD system on the growth of the UK’s solar power sector.

He said: “Solar remains the cheapest source of power in the UK, according to the government’s own figures, although lately installation costs have been affected by factors outside the control of the industry, notably the war in Ukraine.

“So it is gratifying that the maximum bid price has been raised by a significant amount, which should bolster growth further towards reaching the capacity target of 70GW by 2035.”