(Bloomberg) -- Britain will support 4.9 gigawatts of new offshore wind farms as the government tries to revive the sector after a failed auction last year.
The UK promised to ramp up support for offshore wind in this auction to make progress toward its ambitious goal of having an emissions-free electricity grid by 2030. The increased price level of as much as £58.87 ($77.22) per megawatt-hour will feed through to electricity prices for households, creating a difficult balancing act for Prime Minister Keir Starmer who has pledged to bring down bills.
Companies including Orsted A/S and Iberdrola SA’s Scottish Power unit won support for wind farms planned off the coast of Britain.
The UK wants to have 50 gigawatts of offshore wind by the end of the decade. Last year’s auction failed to draw any bidders with support levels seen as too low after equipment costs soared and higher interest rates made it more expensive to take on debt. Britain is a global leader in building wind farms at sea and driving down the cost of the technology through a competitive auction has been key to that success.
“We inherited a broken energy policy, including last year’s disastrous auction round which gave us no successful offshore wind projects,” energy secretary Ed Miliband said. “Today we have now achieved a record-setting round for enough renewable power for 11 million homes, essential to give energy security to families across the country.”
But offshore wind is getting more expensive. Danish renewable power giant Orsted rebid a portion of its Hornsea 3 wind farm at price 45% higher than the level it agreed for the rest of the project in 2022. The company also won a contract for its Hornsea 4 project, making it the biggest winner on Tuesday with 70% of the awarded capacity for offshore wind farms.
The strike prices for offshore wind of below £60 per megawatt-hour don’t account for inflation. The equivalent in nominal terms would be £80 to £85, according to RBC Europe Ltd. That compares with average day-ahead prices in the UK of about £70 per megawatt hour over the last year.
Before last year, offshore wind had been steadily getting cheaper. The auction price in 2023 was too low for any projects to bid and developers complained about the 2022 level too. The UK allowed winning bidders from 2022 to resubmit portions of their projects in this auction. In total about 1.6 gigawatts of those sites won support at higher levels.
On top of that, about 3.4 gigawatts of new offshore wind projects won contracts for the first time in this auction.
Labour promised to lower energy bills by £300 during the election campaign earlier this year. Expanding government support, which is added onto consumer bills, may make the task even more difficult.
Nearly 3.3 gigawatts of solar farms also won contracts that will sell power for about £50 per megawatt hour. That’s about 25% more expensive than the cheapest solar project that won support in last year’s auction. Almost 1 gigawatt of onshore wind farms also won contracts.
A single 400 megawatt floating offshore wind project also won support, potentially making it the world’s biggest wind farm of its kind when completed. As a less-developed technology, it won a contract to sell power for nearly £140 per megawatt hour before the inflation adjustment.
The so-called contracts for difference auctions guarantee fixed prices for 15 years for power producers. If the market price is below the contract level, then the wind farms receive a subsidy. The opposite is also true. During the recent energy crisis when wholesale prices jumped, renewables projects with CfDs were paying back to consumers.
Winning offshore wind bidders agreed to sell power for as little as £54.23 per megawatt hour, before being adjusted for inflation. That’s a 45% increase from the record-low bids of £37.35 reached in a similar auction held in 2022.
(Adds detail on prices in seventh paragraph)
©2024 Bloomberg L.P.
