UK CfD Announcement by Giles Hundleby

The recent UK CfD announcement by the Government has finally brought some clarity to the outlook for offshore wind in the 2020’s. The key parameters from Claire Parry’s speech last week are:

  • Auctions every two years (approximately)
  • 2-4GW per auction (based on statement of 1-2GW per year)
  • Island wind can compete alongside offshore
  • Keep going until the (existing) £557 million pot runs out

So what will that get us? If we look at the last auction, the lowest price was £57.5/MWh. The current reference price for 2023/2024 for calculating how much of the pot is being used up is £47.68/MWh. Ignoring ongoing cost reduction progress for a moment, if we assume future bids are the same as the lowest price last time, each MWh of new wind energy generated (per year) would use up £9.82 of the pot. BEIS is due to publish the final capacity factor assumption used for the calculations in the autumn, but if we use a simple capacity factor assumption of 50%, then each GW awarded would use approximately £44 million of the pot, meaning around 13GW could be supported.

In reality, two factors are going to mean that the pot is not going to run out in the third auction (or in fact, ever!). Firstly, offshore wind prices are going to continue to fall, through learning, efficiencies of bigger projects, next generation turbines (and other innovations) and supply chain improvements. Secondly, the reference price, which is really a reflection of expectations of future electricity cost, is likely to rise along with the forecast rises in global electricity prices. If we get to a situation where both the reference price and CfD bids are at the same level (say the £52.29/MWh used as a reference price currently set for 2024/2025), then the pot size will not be a constraint on the volume installed.

This means that the total volume of GW per auction that is allowed will be crucial in determining the roll-out. Let’s assume for now that a limit of 4GW per auction is set. As of today, there are six large consented UK projects with a total potential capacity of nearly 8.3GW that could bid in the next auction in the first half of 2019. Beyond this, there is another project of up to 2.4GW capacity that has applied for consent and eight project-extension applications that The Crown Estate is evaluating, totalling a further 3GW. So it is likely that both the first two auctions will be competitive, with up to 8GW bidding in each case (assuming unsuccessful bidders in the first auction bid again in the second).

Looking beyond the first two auctions, there are a further eight projects with total potential capacity of 9.4GW in development, to which we must add the projects that emerge from both The Crown Estate’s upcoming ‘round 4’ seabed leasing process and The Crown Estate Scotland’s new leasing process.

Add that all up and it looks like there is a recipe here for a competitive auction process for 4 GW of new offshore and island wind capacity every two years right through the 2020’s. What is needed to complement this UK CfD Announcement is for the government to give firmer information on volume limits, and to deliver on a regular timetable of auctions against which industry can plan.

If you’d like to know more about our views on the UK CfD Announcement or  how we can add insight and strategic advice to your auction bid, please get in touch.

A version of this blog also appears on ReCharge, under the headline ‘UK’s plans are a recipe for offshore wind through the 2020s’ (subscription required)

2018-08-07T10:59:04+00:0030/07/2018|Views|