‘Zero-subsidy’ contracts could push offshore wind to 30GW

Offshore wind capacity could reach 30GW by the 2030s with the right support from the government and Ofgem, Aurora Energy Research has claimed in a new report.

The market intelligence firm says offering offshore wind projects “zero-subsidy” Contracts for Difference and permitting them to stack revenues from balancing and ancillary services could also lower the typical household electricity bill by £20 per year.

Under the present arrangements, Aurora expects offshore wind capacity, which currently stands at 6GW, to rise to between 20GW to 24GW by the mid-2020s.

The low-carbon subsidies already awarded by the government, including in the latest Contracts for Difference auction , will bring the total to 14GW. The £557 million of additional annual support which has been promised for future auctions is projected to add between 6GW and 10GW.

In the autumn budget statement in November, the Treasury announced that no further subsidies will be made available until 2025 to limit the impact of low-carbon levies on consumers bills.

According to Aurora, total offshore wind capacity could be increased to 30GW with no additional funding by offering subsidy-free Contracts for Difference (CfDs) and removing regulatory barriers that prevent offshore wind farms from providing ancillary services and participating in the capacity market and the balancing mechanism.

Hugo Batten, senior project leader at Aurora and author of the report, said: “Stabilising future market revenues via Contracts for Difference significantly reduces risks for investors and is critical in attracting financing and supporting further offshore wind build-out, albeit some future price or merchant risk is transferred to the government and ultimately consumers”.

The strike price would be set at the same level as the average “capture price” on the wholesale market, meaning there would be no net subsidies over the 15-year term of the contract. Aurora’s modelling indicates an appropriate strike price would be £48 to £49/MWh (2012 prices).

With several projects securing agreements at a strike price of £57.50/MWh in the most recent auction, offshore wind costs would need to fall by just 15 per cent to be viable with subsidy-free contracts. Aurora expects capital costs to fall by 25 to 30 per cent between 2017 and 2025 driven by an increase in turbine size to up to 15MW.

Allowing offshore wind farms to provide balancing and ancillary services would additionally increase their revenues by 9 to 14 per cent, while lowering their system integration costs by £6 to £7 per MWh in the 2030s.

“Although intermittent, wind can also rapidly ramp its output up and down and so can contribute to balancing the system and keeping the grid stable,” the report states.

“As demand for these services increases across the system, Aurora modelling indicates there is space for both flexible and renewable technologies to contribute to balancing and ancillary markets in complementary ways.

“Broadening the range of balancing and ancillary service providers should also increase competition in these markets and ultimately lower the cost to end consumers.”

Breakdown of prevent value (PV) of offshore wind costs and revenues in 2025 if both policies enacted

Source: Aurora Energy Research

The volume of flexible generation would need to rise to 22GW by 2030 and 26GW by 2040 to provide sufficient backup capacity.

Nevertheless, the overall effect of the suggested policies would be a 7 per cent reduction in whole system costs – or between £1 billion and £2 billion per year by the 2030s. This translates to an annual saving of £20 on the typical household electricity bill.

Power sector carbon emissions would fall to roughly 60g/kWh by 2040.