Recent speculation in the UK energy sector was correct – the 2nd Contract for Difference (CfD) auction for offshore wind did indeed produce an incredible result, with a strike price of £57.50 per MWh being achieved for two highly significant offshore wind projects.
The results released yesterday by the Department of Business, Energy and Industrial Strategy (BEIS), confirmed that contracts for 3.2GW of new capacity have been awarded to three offshore wind projects: the 860MW Triton Knoll Wind Farm, the 1.4GW Hornsea Project Two Wind Farm and the 950MW Moray Offshore (East) Wind Farm. Both Moray and Hornsea gained contracts with a strike price of £57.50 per MWh, with Triton Knoll due to commission a year earlier with a strike price of £74.75 per MWh. To put the figures into context, the strike price of £57.50 per MWh is less than half the strike price that offshore wind achieved in the 2015 auction. For the offshore wind sector in the UK, this is a huge boost and yesterday’s results confirm that offshore wind, onshore wind and solar are now significantly cheaper than new gas and new nuclear projects in the UK.
Following on from recent tenders in mainland Europe where offshore wind had subsidy free bids in Germany (albeit that construction and transmission infrastructure investment is managed differently from the UK) and with significant reduction in capital costs over the years, optimists forecasted that the UK CfD auction would produce considerably lower figures than the previous auction. Many experts were predicting strike prices in the region of £65-75 per MWh being achieved, with such numbers likely to be considered a huge success – significantly lowering these figures is startling and will renew calls for the UK Government to set out its plans for the timing for future auctions. The UK Government has allocated a further £440 million per year for further auctions to be held before 2020, but has not yet confirmed when these might happen. The CfD regime has shown that in a short space of time, that it has been able to encourage developers to successfully lower the cost of energy, drive down construction costs, embrace new technology and innovate within the sector. Aligned to this, the potential for the three projects to create thousands of new jobs and provide power for approximately 3.6 million homes cannot be understated.
Given the results that have been achieved, it is not hard to recall attending an offshore wind conference in Aberdeen only a few years ago and hear (what seemed to be) highly aspirational targets of reducing offshore wind development to less than £100 per MWh by 2020. To achieve the results yesterday is an important milestone for the industry (well ahead of schedule) and also a welcome boost for the Scottish offshore wind industry, bringing the total number of projects with a CfD to three – following the Beatrice and Neart na Gaoithe offshore wind farms.
It will be interesting to see where the industry goes from here as the projects can now progress and the next batch of offshore wind developments take stock ahead of future auctions – how low can the strike price go in future for example? It will also be interesting to track the opportunities that arise for local communities and the UK supply chain in light of the UK Government’s overall industrial strategy for offshore wind development – it is to be hoped that given the size and scale of investment required, a joined up approach from local, Scottish and UK Government can fully realise such benefits.
Peter Ward is a director in Burness Paull’s corporate team