Offshore wind power comes of age

In the auction on 11 September, two of the three winning wind projects were awarded 15-year CfDs of just £57.50/MWh. With them, offshore wind has come of age.

For many years, advocates of offshore wind have sought to persuade sceptics that they would be able to operate below the £100/MWh cost threshold demanded by the government.

The wind auction held earlier this month (11 September) was widely expected to reveal some dramatic cost price reductions – but in the event it blew away even the most ­optimistic projections.

No wonder Renewable UK, among many other renewable generation ­cheerleaders, waxed lyrical in its assertion that the UK offshore 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 offshore wind are unprecedented for large energy infrastructure.”

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 950MW windfarm promoted by Portugal’s Energias de Portugal Renovaveis (EDPR), which will be constructed near Moray, off the northeast coast of Scotland.

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

Of course, there is no guarantee that all three of these windfarms 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.

Perhaps inevitably, most media attention has focused 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. Energy workers’ union the GMB reckons – rightly or wrongly – that between £10/MWh and £15/MWh should be added in respect of back-up costs.

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

To be sure, some overseas offshore wind auctions, notably in Germany earlier this year, saw some very low prices. Four windfarms, 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 the latest ­auction prices.

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

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

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

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

This auction shows that, currently, the 35-year inflation-adjusted £92.50/MWh CfD for Hinkley Point C is very seriously “out of the money” – and this is many years before the plant is even commissioned. While Hinkley Point C may proceed – it is still not too late for the project to be axed on economic grounds – it means the awarding of similar CfDs for nuclear new-build, both in terms of price and duration, seems less likely.

It is ironic that, in recent years, offshore wind costs have plunged while nuclear costs, partly due to the Fukushima accident, have soared. On 11 September, the cost curves crossed – with a vengeance.

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

And importantly, 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.

More generally, the auction is bound to raise fundamental questions about the long-term generation mix. Will gas and offshore wind generators become the major players over coming decades? Coal is, in effect, being jettisoned, while any major extension of onshore 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 offshore wind generation finally comes of age.