Yesterday’s CfD parameters announcement provides a welcome boost to the UK’s offshore wind deployment ambitions following the failure of AR5 to deliver any new offshore wind. The announcement was welcomed by developers, and with good reason. The administrative strike prices (ASPs) for offshore wind and floating offshore wind were raised by 66% and 52% respectively. It seems that government has listened to developers’ concerns and accepted that higher prices are a necessity, for the time being at least. Prospects for delivery of significant volumes of both fixed and floating offshore wind in AR6 are looking good, with competition between developers maintained to keep prices down. That is without doubt cause for celebration.
The inclusion of a consultation on non-price factors in AR7 is also welcome. By somewhat reducing the focus on price and promoting economic, environmental and social objectives, there is potential to deliver healthy returns for developers alongside a more holistic approach. This is better for local communities and ecosystems and the country, long-term. However, implementation is likely to be challenging. The UK Government should be wary of introducing a ‘beauty parade’ which rewards fine words but adds little value. Methodologies are needed to ensure delivery of commitments and real value-add, rather than making decisions based on the ticking of arbitrary boxes.
Despite the many positives, it is notable how much misreporting there has been in the mainstream press. Many Reporters have not understood that an increase in the ASP represents an increase in the ceiling price, not the actual price paid. Headlines such as ‘UK Government to increase offshore wind subsidies by 66%’ and ‘Price paid for offshore power to rise by 66%’ misunderstand the nature of the CfD and the competitive auction process. The clearing price will be lower than the ASP in practice and is sure to represent good value in comparison with fossil fuel alternatives. For example, In the first offshore wind auction in Ireland earlier this year winning bids at were around 43% lower than the ceiling price. Some confusion is understandable given the complexity of the process. However, I fear this message is getting lost, potentially encouraging net zero sceptics. Developers will still be waiting for the announcement of budgets to understand the size of pie they will be competing for. This will be key to informing bidding strategies and determining the final clearing price. If set too tightly, there is a risk many projects will still be unable to proceed.
There have been struggles with rising prices in offshore wind markets around the world. In the US, several PPAs have been terminated by developers recently. So, other countries will be looking closely at the results of AR6 to provide a benchmark for their own price expectations. The UK Government has made an excellent start to delivering an AR6 to get offshore wind back on a positive path after the disappointment of AR5. The work is not complete. Getting the budget right and, in the long term, introducing the right non-price factors to add real value will be tricky. It will also be critical to setting the UK industry on an ambitious and sustainable deployment pathway. The UK will then continue to be a model for the rest of the world to follow.