Today’s AR6 results are a welcome rebound from the disappointing failure of AR5 to deliver any new offshore wind capacity. Both government and industry will be pleased to have turned the page on that difficult chapter and be getting on with the important business of delivery. Overall, the offshore wind strike price achieved of £58.87 per MWh (strike prices throughout in 2012 pounds) represents a significant increase on AR3 and AR4 strike prices. This likely places industry on a more sustainable footing and will be met with relief by developers and supply chain who have been struggling to turn a profit at the aggressive strike prices achieved in recent rounds.
However, at only 3.3 GW new fixed offshore wind capacity delivered, these results will cast further doubt on the likelihood of hitting the government’s ambitious 60 GW by 2030 deployment target. This is due to two key factors: Permitted reduction bids from AR4 projects, and a significant chunk of the pot 3 budget remaining unspent.
The £37.35 per MWh strike price achieved for offshore wind in AR4 represented an extremely challenging hurdle for projects to overcome, and AR4 participants have found it difficult to achieve FID at this price in the light of cost escalation in the supply chain. As a result, we have seen AR4 winners East Anglia 3, Inch Cape, Hornsea 3 and Moray West returning to the CfD in AR6 to make use of its ‘permitted reduction’ facility. This allows previously successful projects to hive off up to 25% of their capacity to bid again as a ‘new’ project. The higher £54.23 strike price achieved by these projects in AR6 will be effective in terms of derisking and unblocking the deployment of this capacity. However, the 1.6 GW capacity successful via this mechanism is not additional to capacity previously announced, and the £251m of the £1.1bn pot 3 budget dedicated to this cuts into that available for new capacity.
In addition, it appears that a significant chunk of the pot 3 budget, approximately £230m, or 21%, remains unspent. This is likely a case of the next cheapest project behind the successful East Anglia 2 and Hornsea 4 being too large to fit within the allocated pot budget. This is probably more a case of bad luck than bad planning, but both industry and government would have preferred to see the budget fully utilised to drive forward as much deployment as possible.
The success of Flotation Energy’s 400 MW Green Volt project in the floating pot is eye catching. With the backing of the CfD, Green Volt is now in a strong position to become the first multi-hundred MW floating project anywhere in the world, and the test case for the commercialisation of the technology. Less delighted will be the smaller floating offshore wind projects who missed out in this round as a result of Green Volt’s success.
UK offshore wind is back, and that is something to be celebrated, but AR6’s focus has been diverted to some extent by righting the wrongs of previous rounds, rather than delivering new capacity. Future rounds will need to deliver more, and faster, to keep the UK’s energy transition on track.