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Offshore wind breaks through

By Dave Elliott

It’s unusual but things do occasionally change in the UK. We had been quietly awaiting the government’s much delayed Carbon Plan but then came an unexpected shock, a dramatic fall in offshore wind prices emerging from the new round of the Contract for Difference (CfD) auction process. Hornsea Project 1, now being built, had got a CfD strike price of £140/MWh in the first full CfD round in 2014. But in this second one, Dong’s huge 1.3 MW Hornsea Project 2 won a contract at £57.5/MWh for a 2021/22 start up – 60% less. So did another offshore large wind project, in Scotland, for a 2022/23 start up, while a third one got through at £74.5/MWh. That’s still way below the index-linked £92.5/MWh allocated to the Hinkley nuclear project, which won’t start up until years after these projects, if it ever does.

These are much larger cost falls than most expected, and the strike prices are far less than the indicative “administrative” prices used by the government (£105 for 2021/22, £100 for 2022/23), despite there having been projects going ahead in Denmark at under £44 per MWh, or around £55 per MWh including grid connection costs. Six biomass projects that also got CfD contracts were also much cheaper than expected, 35-40% less than the administrative price. In all, 3.4 GW of capacity was awarded contracts, with a total worth of around £760m p.a.

The Renewable Energy Association said, as reported by Edie, ‘We knew today’s results would be impressive, but these are astounding’. Its head of policy and external affairs, James Court, said ‘These results show that renewables are now the most cost-effective form of any energy generation which can future proof both the UK grid and provide sustainable new jobs in the UK. Offshore wind’s success shows what can happen with government support, and consider that this auction was for so-called ‘less established’ technologies, with the more mature onshore wind and solar blocked to market. Surely now is the time for the government to commit to a low carbon industrial strategy.’

It was all certainly surprising, and potentially game-changing.  Writing in the Telegraph, Ambrose Evans-Pritchard said if you are looking for a turbo-charged venture to lift British fortunes after Brexit, offshore wind is as good as it gets’.

The Times ran an editorial (12/9/17) saying ‘the contrast with Hinkley Point could hardly be any more stark’. It couldn’t be used to balance variable wind, so ‘the case for such an unwieldy and unproven design is hard to make’. Given its inflexibility, they were evidently not convinced by EDF’s assertion that ‘new nuclear remains competitive for consumers who face extra costs in providing back-up power when the wind doesn’t blow or the sun doesn’t shine’.

And with Carbon Brief suggesting that offshore wind, as well as onshore wind and solar, were now even cheaper than new gas plants, surely it’s time for a revised Carbon Plan and national energy plan.

Certainly that’s what many greens thought. The argument, based on prices, goes like this.  The wholesale price of electricity in the UK is falling. Good Energy has shown that this has mainly been due to the spread of marginal cost renewables – they have no fuel costs, so they are the cheapest source, when available. If allowed to expand, they will make it possible for retail prices to fall, if the power utilities can be made to pass on the saving, or are nationalised.

However, there’s a problem, at least in some renditions of the situation. Keith Barnham has argued that the government ‘is desperate for the wholesale price to stop falling because the contract for difference for Hinkley Point C commits consumers to pay a levy on their electricity bills to subsidise the difference between the wholesale price at the time and the agreed high nuclear price. If the renewables keep the wholesale electricity price falling, the nuclear levy will raise the retail price on consumer’s electricity bills even further and will be a major political embarrassment’.

That’s one reason why, it is argued, the government is blocking the spread of low-cost renewables like onshore wind and large-scale PV solar. But this is getting harder and harder to justify as renewable costs continue to fall, pushing wholesale costs down even more.

A counter argument is that, as variable renewables expand, the cost of balancing them will grow. However, that cost seems likely to be small, maybe 10-15% extra, easily offset by the generation cost reductions, with the dramatic new price falls for offshore wind adding a further impetus, assuming, of course, that they can be delivered in practice. But there are default penalty provisions, so that should not be an issue. Although the Global Warming Policy Forum sees it all differently.

Another view is that the government’s approach has come unstuck. If you believe the cynics, the government had backed offshore wind (rather than cheaper onshore wind and large PV), perhaps (say cynics) since it looked likely to stay expensive, and so leave nuclear looking relatively cheap. But with 3.2 GW of cheap offshore wind now soon available, and more no doubt to follow, that narrative is bust. The case for the 3.2 GW Hinkley project especially.

All of which will make Deiter Helm’s ongoing energy price review for the government interesting reading. He has in the past been a little sniffy about renewables and pro nuclear, but also pro-market competition. The debate on prices and policies had already been heating up well. The new CfD results give it a big twist. With the cost argument now overwhelmingly on the side of renewables, it will be hard for Helm to ignore them. For example, the Green Alliance says that without faster deployment of renewables and energy efficiency, consumers could end up paying £2.6 bn extra annually in 2025, doubling to £5.3 bn by 2030, mainly for building and running new gas plants. It says nuclear would be even more expensive.

All this has to feed into the Carbon Plan and requires a strategic rethink. A new approach. Whatever the original motivations for the government’s initial support for offshore wind, the longer-term lesson from the CfD price fall seems to be to persevere, even if something looks costly to start with. That message was reinforced by a talk from Agora on the German Energiewende at the House of Commons on the day the CfD news broke. It was claimed that Germany will soon harvest the benefits of its early FiT-led investments, raised from consumers, with subsidies falling as renewable prices fall faster than anyone hoped, and as coal and nuclear costs are eliminated.

That may be a bit of an optimistic prognosis – there are policy problems. But the path ahead still seems clear. Can the UK head that way?

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