Posted on September 11, 2023
The developers weren’t bluffing about the rising cost of building offshore windfarms. They had warned for months that they wouldn’t pitch to build turbines in the North Sea on the terms the government was offering, and they did what they said they would do. No bids were received in this year’s auction for new projects. The auction was a flop.
There are two big questions here. First: how did the government, which maintains it is committed to hitting its target of 50GW of offshore capacity by 2030 (more than treble today’s level), seemingly fail to see this coming? Second: what is the plan now?
On the first score, there can be no excuses. Companies always have a lobbying interest in screaming about cost pressures, but the difference this time was that the line rang true. Long-term financing costs have obviously surged with the rise in interest rates in the past 12 months, and supply chain inflation is everywhere from steel to transport. Setting a maximum price in auction of £44 per MW hour – virtually the same as last year – always looked vulnerable to finding no takers.
The writing was on wall when the Swedish developer Vattenfall halted work on a big project off the coast of Norfolk that was a winner in last year’s auction. The company reckoned it was cheaper to take a financial hit of £415m, covering the work it had done so far on the Norfolk Boreas development, than carry on. Companies do not take such decisions on a whim.
Grant Shapps, the energy security secretary until last week, reacted to the looming crunch by fiddling around the edges. He refused to budge on the £44 maximum but added to the pot of money available to write contracts at that price. From offshore developers’ point of view, they were just being offered more of what they did not want. The tweak was never going to alter the economics.
A more generous interpretation is that ministers consciously played hardball and accepted the risk of a failed auction in the hope that prices settle down in time for next year’s event. That, at least, would have a superficial logic. Yet the practical problem is that any imagined “saving” will probably be consumed by the need to catch up to try to save the 50GW target. The developers’ negotiating hand has just improved for the next auction. Therein lies the sense of managing the expansion of windfarms at a steady pace.
The future approach is now the issue. Yes, after several rounds of “record low” auctions over the past decade, it is a shock to discover that offshore wind prices can rise as well as fall – there will be an effect on consumer bills. But sticking with gas is hardly an appealing alternative, whatever net zero sceptics may say about hidden costs of remodelling the electricity grid to cope with more intermittent supplies. Even allowing for such system costs, offshore wind still looks more competitive than gas on current 15-year projections, which is the life of these price contracts.
Nor do onshore wind or solar, despite the expansion of these technologies within this auction round, offer an alternative to offshore’s big turbines. A balanced renewables strategy means doing the lot, but offshore has always been intended to be the workhorse.
The energy consultancy Aurora calculates that, to meet the goal of 50GW by 2030, the government would have to procure 10GW offshore capacity in the next two auction rounds given the time it takes to build a large offshore windfarm. That’s a tall order.
The chief executive of one big developer said: “Stopping and waiting for 12 months is not easy. You’ve got £400m of capital in the balance on one of these big projects and you’re trying to go back through the supply chain and renegotiate contracts and shift delivery slots.” It was doable, he said, but another flop really would bring the offshore show to a halt.
The government says it will work with industry to retain the sector’s leadership. That is an ambition, as opposed to firm policymaking. The first step – bad news for all of us – is to accept that the economic breezes have shifted and that offshore wind, while still cheaper than the alternatives, is not as cheap as it was. That uncomfortable fact of life, as ministers should have accepted, was obvious months ago.