Britain’s offshore wind industry is expecting to lose out on financial help for projects toward meeting the UK’s climate goals, because soaring inflation means developers are not able to compete for crucial government support.
Ministers are expected to announce the results of the latest auction for financial support contracts this Friday, but energy industry insiders suggest it could be a damp squib in a potential blow to the UK’s climate goals.
Sources fear that most offshore wind developers were forced to sit out of the bidding, which took place last month, because the government “ignored” warnings about surging costs in the sector.
One said it was possible that only one or two projects had submitted bids, which would jeopardise the government’s target of reaching 50GW of offshore wind by 2030.
It may be that no offshore wind developers took part, the source added, which would scupper plans to provide cheap power to consumers and to increase the UK’s energy security.
Renewable-energy developers were required to submit sealed bids in the auction in the first half of August, before officials ranked the most competitive proposals over the second half of the month. Only the projects offering the lowest cost to energy-bill payers secure contracts.
The government set a maximum price of £44 per MW hour for the auction, a similar level to the previous round. But offshore wind developers are facing soaring construction costs, owing to rising inflation and higher borrowing costs.
Earlier this summer such inflationary pressures caused work on a large-scale offshore windfarm off the Norfolk coast to stop. The Swedish energy firm Vattenfall said it would cease working on the multibillion-pound Norfolk Boreas windfarm, designed to power the equivalent of 1.5m British homes, because its costs had increased by more than 40%, so it was no longer profitable.
At the time, industry experts told ministers that unless the government’s financing approach was changed to take into account the steep increase in costs, developers would be forced to scrap or delay their plans.
Ana Musat, RenewableUK’s executive director, said the “perfectly avoidable” financial dilemma facing the British wind industry risked removing the UK’s global lead in offshore wind at a time of increased competition from the US, Europe and parts of Asia.
“We can’t have a ‘boom and bust’ cycle and expect to maintain investor confidence in the UK and grow our supply chains,” Musat said. “It’s such a shame – we’ve been world-leading in this. But we do need to evolve the tools which brought us here.”
The industry group has consistently called on the government to adapt the auction by taking into account the higher costs in the economy.
Sam Richards, the founder and campaign director for Britain Remade, which promotes economic growth in the UK, said the offshore wind industry had reduced costs at each consecutive auction over the past decade, to the point that offshore windfarms were nine times cheaper than new gas plants.
However, the impact of inflation meant the auction was now “at a level that made it impossible for investors to meet their costs”.
“Offshore wind has been a huge success for Britain – we have led the world in deploying offshore turbines, with the four biggest offshore windfarms in the world all off the UK coast,” he said. “Sadly, ministers have ignored warnings from industry that would mean, for a short time, the cost of offshore wind rising – while still likely being significantly cheaper than new gas plants.”
Ashutosh Padelkar, a senior research associate at Aurora Energy Research, said the “unprecedented cost pressures” could cause developers to enter only part of their offshore windfarms into the auction while relying on bilateral deals with energy-intensive companies to guarantee the rest of their income from the project.
This “hybrid financing” model is relatively unusual in the UK energy market, but the approach could help developers to fix a guaranteed price for their electricity, “increasing the likelihood that a project will reach financial close and, eventually, come online”, Padelkar said.
He added that solar developers could “dominate this auction” because their projects were cheaper and less exposed to the increasing costs in the offshore wind supply chain.
The blow to offshore wind is expected to be revealed days after the government left onshore wind developers disappointed by changes to the planning laws, which have acted as a de facto ban on onshore wind in England. While the tweaks will make it easier for onshore wind developers to apply for planning permission, they will still be at disadvantage compared with any other infrastructure project.
Campaigners say developers may still be wary of investing in windfarms in England because they face greater hurdles compared with other infrastructure applications, or with windfarms in other countries.
