Nigel Hawkins: Off-shore wind comes of age

Analyst Nigel Hawkins assesses the wider implications of the record CfD results

For many years, advocates of off-shore wind have sought to persuade sceptics that they would be able to operate below the £100 per MWh cost threshold demanded by the Government.

Last Monday’s wind auction was widely expected to reveal some dramatic cost price reductions – it blew away even the most optimistic projections.  

No wonder, Renewable UK, amongst many other renewable generation cheerleaders, waxed lyrical in its assertion that the UK off-shore wind sector really had become mainstream.

Its chief executive, Hugh McNeal, said: “We knew today’s results would be impressive, but these are astounding. Record-breaking cost reductions, like the ones achieved by off-shore wind are unprecedented for large energy infrastructure.”

The winners

In Monday’s wind auction, two of the three winning projects were awarded a 15-year Contract for Difference (CfD) of just £57.50 per MWh.

The larger of the pair is the Dong Energy-financed Hornsea 2 development off the East Yorkshire coast. 

The other project, with the same priced CfD, is the 950 MW wind-farm promoted by Portugal’s Electricidad de Portugal Renovaveis (EDPR), which will be constructed near Moray, off the north-east coast of Scotland.  

The third winner, albeit at a much higher valued 15-year CfD, is the Innogy/Statkraft, 860 MW project at Triton Knoll, which is located off the coast of Lincolnshire.

Of course, there is no guarantee that all three of these wind-farms will actually be built.

But major international players are involved, both with a good track record of technical achievement in the energy sector and with access to the necessary funds.

Comparative numbers

Perhaps inevitably, most media attention has focussed on the very low-priced CfDs that have been awarded.

However, any read-across to the costs of other energy projects needs to take account of specific factors.

In this case, there will be back-up costs that arise when these plants, for whatever reason, are not operational.  

The GMB, the energy workers’ union, reckons – rightly or wrongly – that between £10 per MWh and £15 per MWH should be added in respect of back-up costs.

On that basis, the net cost for Hornsea 2 and Moray comes in at c£70 per MWh, a highly competitive price compared with, say, three years ago.

To be sure, some overseas off-shore wind auctions, notably in Germany earlier this year, saw some very low prices.

Four wind-farms, three owned by Dong Energy and the fourth by Germany’s EnBW, were awarded CfDs at an average 0.44 cents per KWh, well below even Monday’s auction prices.

However, several one-off factors come into play which cloud direct comparisons; in some cases, part of the necessary investment has already been undertaken.

Nonetheless, the trend of sharply falling off-shore wind prices seems irresistible – unless interest rates rise appreciably as they may well do.   

Against this background, a surge in off-shore wind-power investment seems inevitable. It is destined, on this basis, to be a real winner over the next two decades.

Implications elsewhere

Elsewhere in the electricity sector, there will be concerns on several fronts.

This auction shows that, currently, the 35-year inflation-adjusted £92.50 per MWh CfD for Hinkley Point C is very seriously ‘out of the money’ – and this is many years before the plant is even commissioned.

Whilst Hinkley Point C may proceed – it is still not too late for the project to be axed on economic grounds – it means that the awarding of similar CfDs for new nuclear-build, both in terms of price and duration, seems less likely.

It is ironic that, in recent years, off-shore wind costs have plunged whilst nuclear costs, partly due to the Fukushima accident, have soared.

Last Monday, the cost curves crossed – with a vengeance.

The prospects, too, of financing the Swansea Bay Tidal Lagoon project have receded. Attempts to persuade the Treasury to agree to an ultra-long CfD seem to have fallen on stony ground.

Importantly, too, the high-profile MayGen tidal scheme in the Pentland Firth also missed the cut by failing to win a CfD.

Officials at the Treasury will be cock-a-hoop that their long-standing obsession with developing price tension has produced an auction where the subsidies required are way below expectations.

Indeed, it is probably the best news the Treasury has received since the 3G telecoms auction in 2000 raised a staggering £22.5 billion.

Questions for the future

More generally, the auction is bound to raise fundamental questions about the long-term generation mix.

Will gas and off-shore wind generators become the major players over coming decades?

Coal is, in effect, being jettisoned, whilst any major extension of on-shore wind capacity is constrained by nimby-related issues.

And nuclear costs are soaring like never before, as demonstrated by Olkiluoto, Flamanville and Hinkley Point C.

All this adds up to, quite literally, a sea-change in the UK generation sector.  

We live in interesting times, as off-shore wind generation finally comes of age.  

Nigel Hawkins (nigelhawkins1010@aol.com) is a Director of Nigel Hawkins Associates which undertakes investment and policy research