UK Offshore Wind: Back on Track After AR6

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Thibault Desclée

The offshore wind industry is gaining back its momentum after experiencing significant headwinds last year. The 5th Allocation Round (AR5) of the UK’s Contract for Difference (CfD) scheme in 2023 failed to attract any offshore wind projects, neither fixed-bottom nor floating. This marked the lowest level of new renewable capacity awarded since 2017. Offshore wind developers did not participate in the auction because the Administrative Strike Price (the term used for the bid cap in the auction) was set too low, not reflecting the surge in costs primarily driven by the supply chain disruptions, inflation in key commodities, and increased financing costs due to the Covid crisis and the invasion of Ukraine.

Recognizing these major changes in the market conditions, the UK government acted quickly and responsibly. AR5 results were published in September 2023, and the Administrative Strike Price for AR6 was updated in November 2023 following consultations with the industry. This swift response is a commendable example of government accountability and leadership, both in terms of speed and industry engagement.

As a result, the government raised the ceiling price for offshore wind by 66% for fixed-bottom offshore wind projects, from £44/MWh to £73/MWh (2012 prices), and 52% for floating wind, from £116/MWh to £176/MWh (2012 prices) – and significantly increased the budget for AR6 to £1.1 billion, an uplift of £300 million for Pot 3 (Fixed Bottom offshore wind). For emerging technologies, including floating wind, in the Pot 2, the budget rose from £165 million to £270 million, demonstrating a strong commitment to accelerating the deployment of renewables, especially floating offshore wind.

AR6: Back on track with the biggest auction to date

The impact of these changes was evident in AR6, which has become the largest CfD auction to date; a total of 131 clean energy projects were awarded. Over 5.3 GW of capacity was secured by offshore wind projects, representing more than 50% of the total renewable energy capacity granted. Nine bottom-fixed offshore wind projects were awarded, resulting in a total capacity of 4.94 GW. Of this, 3.36 GW were awarded to new projects, while 1.57 GW were for projects that re-bid a portion of their capacity to improve viability. Strike prices for bottom-fixed projects ranged from £54.23/MWh to £58.27/MWh, marking a 60% increase compared to AR4 in 2022.

On the floating wind front, four eligible projects were competing, with only GreenVolt being successful with 400 MW awarded. For the first time, a commercial-scale floating wind project secured a CfD contract in the UK. The 560 MW intended capacity will make Greenvolt the largest floating offshore wind project in the world with a CfD contract secured. Delivering at a strike price of around £140/MWh (in 2012 prices, equivalent to ~£195/MWh in 2024), this project is poised to become a crucial steppingstone for future large-scale floating wind projects.

This outcome sets a new reference for floating wind, compared to the much lower price awarded in France’s AO5 auction earlier this year. The French AO5 strike price of €86/MWh (~£73/MWh in 2024 prices) is not viewed as the new standard by WindEurope, whereas the AR6 results are likely to establish the new benchmark.

Next Steps for the Offshore Wind Industry

While these results are encouraging and show that regulatory adjustments can accelerate project delivery, the offshore wind industry cannot afford to slow down. To be able to deliver an ambitious pipeline, the focus must shift to an annual commitment of offshore wind volume with an increased percentage being allocated to floating wind.  To achieve this, auction designs must continue to attract viable projects.

To further strengthen future CfD auctions, several areas could be addressed:

  • Reconsideration of the reference price and technical parameters that can lead to unspent budgets, continued reliance on fossil fuels as well as higher cost – like the £200m unspent budget evident in AR6 – which result in a lost opportunity driven by technical misassumptions in the reference price for electricity in the UK.
  • Improve the Price Indexation Model: by:
    • introducing differentiated indexation for the development/construction phase and the operational phases respectively
    • using more refined indexation factors (not only inflation, but also commodities and labor cost) to more accurately reflect the underlying cost structures within these phases or specifically exclude certain costs from CfD entirely and operate with a pass through mechanic
  • Longer CfD Tenors: Extending the contract length from 15 to 20-25 years would provide more stable revenue streams for projects, allowing for lower bid prices and lower costs to the consumer. The experience of Denmark, France and Ireland who have 20-year CfD’s and Poland who have 25-year CfD’s show how this can operate well
  • Increased Budgets: To meet the commitment made to a zero-carbon energy system, larger budgets are required for floating wind projects in all future allocation rounds, supporting the important contribution of the 25GW pipeline of leased floating projects across the UK.
  • Sustainable Industry Rewards (SIRs): As the UK looks to introduce an element of the CfD to drive supply chain and skills support, it’s essential to clearly define the requirements and thresholds in good time to attract viable projects.

This approach balances the positive momentum within the offshore wind sector with a clear outline of what still needs to be addressed to meet the UK’s ambitious goals. The next CfD rounds will be crucial, but with the right measures in place, the offshore wind industry is well positioned to continue its growth trajectory.

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