The 148 pages of the Chancellor’s UK Budget Report 2016 contain some long-anticipated clarity on the support offshore wind can expect to receive in the next decade.
Crucially, it reveals a stark reality for the UK offshore wind industry – it has until the middle of the 2020s to reach cost parity with Combined Cycle Gas Turbines (CCGT).
For projects being commissioned in 2021, the Government has capped the strike price for a CfD at £105/MWh. Our modelling suggests this is equivalent to a levelised cost of energy (LCOE) of £97 to £100/MWh, depending on factors such as project lifetime and the cost of capital. For projects being commissioned in 2026, the strike price falls to £85/MWh, which is equivalent to an LCOE of £80 to £82/MWh. Note that all these costs are in 2011-12 prices.
This level of support shows the Government is pushing the industry to go beyond its previous expectations of what could be achieved. In the 2012 Offshore Wind Cost Reduction Pathways Study, The Crown Estate said the industry should reach an LCOE of £100/MWh for projects reaching final investment decision (FID) in 2020 if it had confidence in a market of sufficient volume. Assuming the lag between FID and commissioning is approximately three years, the Government now expects the industry to reach this milestone two years ahead of schedule and with a significantly smaller market volume than industry had said was needed. The main reason why this has been possible has been the faster than expected uptake of larger turbines, accelerating LCOE reduction. Importantly, there is still the challenge that this progress in turbines masks slower cost reduction in other areas of supply due to the lower market volume and visibility.
Looking to projects with FID in 2023 that will be commissioned in 2026, our modelling shows the strike price of £85 per MWh would take offshore wind to approximate parity with the LCOE of CCGT (based on the most recent DECC forecasts of gas and carbon prices). As CCGT is currently the most viable large-scale generation technology, this effectively means offshore wind can be seen as “subsidy-free” by this point.
So, these announcements set the new landscape for the UK’s offshore wind industry. Developers will either be able to hit the Government’s new cost curve towards cost parity or their projects do not get support.
There are a number of reasons, however, why the industry is likely to welcome this latest news. Firstly, it gives some visibility of activity beyond 2020, which should help the supply chain to make some level of investment in infrastructure and equipment. Secondly, it is robust, independent evidence showing that offshore wind is on a path towards becoming subsidy-free.
Having led much of the industry engagement and modelling for The Crown Estate’s 2012 study, our latest modelling also now suggests that industry will actually have a good chance of exceeding these aggressive new targets. It is worth noting, however, that this level of LCOE reduction will be dependent on the ongoing development of a sustainable UK market. Realistically, this needs to involve at least 1GW of deployment a year with up to five years of project-scale visibility and a longer-term market-scale logic of how offshore wind , with its cost trajectory, fits with other technologies on their cost trajectories. We anticipate that the Government will give more clarity on these issues in its next carbon budget. We will be considering what the Government’s announcement says about market volume in a future blog.