For the past few months, UK offshore project developers have been sitting (and probably lobbying) nervously.
The sources of their anxiety were the UK Government’s much discussed deliberations on zonal pricing and amendments to the CfD allocation framework. We now have clarity and overall the industry should be pretty relieved. On zonal pricing, the Government accepted industry’s view that while it may have theoretical benefits, it would stall market growth at a time when the government has high hopes for offshore wind deployment. An interesting parallel was UK Electricity Market Reform in 2013. Existing ROC projects were completed in 2014 and 2015, but it was 2018 before the market really picked up again. If something similar happened again in the UK market, we would be even further from meeting 2030 targets than we already are.
For the AR7 framework, the final proposals are reasonable and suggest the Government is committed to a positive outcome for the industry for AR7.
The extension to eligibility for fixed projects is a pragmatic solution to avoid a consenting cliff edge, where a short delay in getting consent mean that project have to wait 1-2 years for the next allocation road. Projects need to have reached a significant milestone 12 months before the AR. It doesn’t open the flood gates to immature projects. It will encourage the Government to provide a bigger a budget in AR7, as it knows it will get sufficient competition. Yes, there is a risk that projects will hand back their CfDs if consent is refused or conditions render the project uneconomic, but it is worth remembering that no UK offshore wind project has been refused consent since Navitus Bay in 2015. Yes, there is a risk that developers will bid with an incomplete understanding of market pricing, but the industry is a pretty cautious place at the moment and this would lead to a price risk premium. An unconsented project is therefore likely to be uncompetitive in any case.
The potential for the Secretary of State to adjust the budget after bids are received is also welcome. Too much budget has been left unspent in previous ARs. It makes for interesting bid strategy development, of course.
Increasing the CfD periods from 15 to 20 years is sensible. There’s no extra cost now and it may bring bid prices down as it will lower merchant tail risk. Anything that lowers offshore wind prices can head off the pressure from anti-Net Zero and decarbonisation populism.
Commitment to supporting multiple test and demonstration floating projects is excellent news. The risk for commercial scale projects is too high currently and the industry needs to doggy paddle before it learns to front crawl.
While the industry can finally move forward and prepare AR7 bids, a personal plea from me to the government: stop tinkering beyond what is required. Global offshore wind developers are increasingly picking their favoured markets and governments that want offshore wind to make their market attractive. Developers want a sizeable market, favourable political environment, attractive support mechanisms… and stable regulatory frameworks. Overall, the UK scores very well compared with many other markets. Whilst evolution is often justified and necessary, please bear in mind the impact that changes between allocation rounds can have on market confidence and attractiveness.
