Swings and roundabouts for UK offshore wind this week, as new changes to CfD scheme introduced to accelerate deployment, but the shelving of Orsted’s Hornsea 4 rains on the Government’s parade.
The UK Government this week announced a shift to a capacity led rather than a budget led process for CfD auction round 7 (AR7). This means Government will decide how much it wants to procure, see the bids, and then subsequently make a decision on budget, with a clearer view of the exact implications in terms of awarded capacity and projects.
This will give the Government greater flexibility in ensuring it can procure enough capacity through upcoming CfD rounds to meet its Clean Power 2030 Action Plan ambitions. It will allow Government to set budgets in full knowledge of exactly how much capacity it will award, helping avoid issues of significant unspent budgets as seen in previous rounds, and give Government more control in accelerating deployment toward capacity targets.
Overall this is a positive change. Although these changes increase the uncertainty and opacity of the bid process for developers, they give Government new levers to ensure it delivers its deployment ambitions. They are unlikely to significantly impact strike prices, provided a competitive dynamic can be maintained through setting appropriate capacity ambitions.
Deployment will need to be accelerated to meet the UK Government’s 2030 ambition to have at least 43 GW operational offshore wind in UK waters. This is especially true in the light of Orsted’s decision this week to pause progress on the 2.4GW Hornsea 4 project, citing “several adverse developments relating to continued increase of supply chain costs, higher interest rates, and an increase in the risk to construct and operate Hornsea 4 on the planned timeline for a project of this scale”.
Although the changes to the CfD give Government greater flexibility and control, they do not address the fundamental challenges which led to the cancellation of Hornsea 4 in its present form. Government will now be looking nervously at other AR6 projects and wondering if others will follow suit, giving the UK an even bigger mountain to climb to meet 2030 targets.
Questions will be asked about why Hornsea 4 has become the second large offshore wind project in two years to be put on ice – following Vattenfall’s Norfolk Boreas in 2023 – and what can be done to prevent this happening in future.
Perhaps the most obvious remedy would be a better tailored indexation mechanism, with protection for developers against swings in steel, copper and fuel prices, as well as interest rate fluctuations. We are seeing other markets implementing increasingly sophisticated indexation mechanisms in offtake auctions, and the UK’s CPI-linked solution is now looking a little outdated by comparison. Stronger non-delivery penalties could also help discourage developers from dropping projects late in the development cycle, and promote more conservative bidding practices which could help repair squeezed margins.
Government has not yet given any indication of where it stands on the controversial issue of allowing unconsented projects to bid. The additional delivery pressure placed on them by Orsted’s decision may lead them to look again closely at this option, despite industry fears that it will lead to further uncertainty and delay in the supply chain.
