Wed, May 29 2024 29 May, 2024

UK wind power hits milestone but challenges remain

A study by Imperial College London says that for the first time UK wind power provided the country with more electricity than gas.

Wind Turbines off the coast in North Yorkshire, the UK. (Photo credit: Colin Ward/Adobe Stock)

We can’t see, or hear them from our homes, but every day, far out to sea, hundreds of gigantic wind turbines – many of them equipped with 80-metre blades – cut through powerful North Sea winds. Collectively they generate around 13 percent of the UK’s electricity, while a study published in May by Imperial College London says that for the first time UK wind power provided the country with more electricity than gas.

It was clearly a turning point of sorts for the UK. But to what extent is it really a game changing moment?

A paper by Wood Mackenzie, entitled, ‘Navigating the trillion dollar offshore wind opportunity’ suggests that some momentous opportunities and challenges lay ahead, not just for the UK, but for the world.

Industry challenges

So what are the greatest obstacles that the industry faces? Soeren Lassen, Wood Mackenzie’s Head of Global Offshore Wind Energy Research, who co-wrote the study, says, “we estimate that project returns are falling and we have seen supply chain margins decrease since 2015, making it increasingly challenging to profitably seize the opportunities in the offshore wind sector.”

Lassen’s point is perhaps best illustrated by two offshore wind auctions run by the UK and Spanish governments. In Spain, design flaws in a recent onshore wind auction meant that just 46MW of capacity was awarded, while in the UK the latest application window for Allocation Round 5, an offshore wind auction, has left some bidders less than enthused.

So what has gone wrong in Spain and the UK? In regard to Spain, Chris Rosslowe, a senior energy and climate data analyst for Ember, a global energy think tank, puts it down “to poor auction design.” He says that “a secret cap in the auction,” which none of the developers who entered the auction knew about, meant that they “did not know they were bidding above the cap amount.” This, says Rosslowe, led to “no solar projects being awarded and only a tiny fraction of onshore wind projects being granted.”

Spanish auction “a one-off”

While Rosslowe believes that the auction debacle in Spain “was a one-off,” he says that onshore wind tendering schemes throughout Europe “have been slightly undersubscribed over the last year.”

Take the UK for instance. The upcoming Contracts for Difference tender, which gives companies a guarantee that customers will pay a fixed price for the electricity that is generated by their projects, opened in March with results expected in September. Despite SSE Renewables projects Seagreen 1A Strathy South, Bhlaraidh Extension, Aberarder and Viking all eligible to bid for the auction, Alistair Phillips-Davies, the CEO of SSE says that the auction “doesn’t look feasible.”

Phillips-Davies told The Times that the government, at £44 per megawatt hour, had “set the prices at the wrong level and I don’t think they’ll (the government) will get anything built.”

A spokesperson for SSE told Gas Outlook that “the low administrative strike price (caps) in the auction, particularly for offshore wind, do not reflect the cost increases faced by projects.”

As a result, the spokesperson confirmed that SSE Renewables would “not be entering Seagreen 1A into the auction,” but added that “it will continue to seek an alternative route to market to progress this project.”

Auction pricing

So, what does SSE think the price should be? Gas Outlook put the question to SSE’s press office, but it did not answer it. However, in a statement, it did cite “supply chain cost pressures and the decision by government to limit the price offshore wind can receive in the auction,” as its chief reason for not participating.

When asked the same question, Rosslowe also did not wish to speculate on UK auction pricing, but said that “project costs had increased.”

Rosslowe, who has worked for Ember for nearly four years, explains, “It is not just about offshore wind companies having to factor in the cost of inflation and high interest rates, they also need to price in future costs because these companies have to order components today to build the future offshore windfarms of tomorrow. That means carefully assessing what the CAPEX environment will look like a few years down the line.”

Consumer benefits

That said, Rosslowe believes that even if governments in Europe set the auction strike price at a higher level, consumers are still getting a good deal.

He explains, “In a sense, across Europe at least, the offshore wind sector has become a victim of its own success. It drove down costs considerably over the last decade from £150 per megawatt hour in 2014 to £37 per megawatt hour in 2022. In some schools of thought, there is a belief that we need to start paying a little more for this critical energy source. Even if the strike price exceeds £44, we have to bear in mind that the spot price for power in the UK, which is set by the gas price, is still £100 per megawatt hour.”

However, Lassen says it is not just about the policy but also the bidding strategies by the developers. He says, “Policy-makers do not set the final strike price. They set the range by providing a bid ceiling and a bid floor. Historically, it is competition between rival bidders that has been pushing down prices for offshore wind, not the bid ceilings set by policymakers.”

Profits squeezed

While Lassen believes that competition has reduced costs, it has also “contributed to falling margins” meaning developers are making less profit from their investment. So, how should governments react to this and, more importantly, what does this mean for future auctions?

Lassen, who is based in Aarhus, Denmark, believes that policymakers “must focus on both the bid ceiling and the bid floor.” But why? “The ceiling influences the number of bidders,” he explains. “Since 2016, government’s underestimation of offshore wind cost reductions and developer’s strong appetite for offshore wind has meant that bidders have not been hitting the bid ceilings. Instead, they have been hitting the bidding floor. This trend has made developers continuously lower both the bidding ceiling and floor and introduce non-price criteria.”

Bidding floors important

Lassen adds that bidding floors “continue to be important – especially in combination with non-price criteria.” However, he also notes that “macroeconomic developments and supply chain constraints” have applied upward pressure on price, meaning that “the bidding ceiling will become increasingly important in the future too.”

Bearing this in mind Lassen says that the offshore wind sector “must think beyond price.”

He concludes, “Developers who can demonstrate sound business cases, which incorporate local content, systems integration, ecological mitigation, and sustainability, are more likely to secure offtake bids than those who are content to compete solely on price.”

It is a viewpoint that all developers must surely take into account when placing future bids.

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