Another steep fall in the cost of offshore wind is to be welcomed, but an analyst warns that returns from wind – which might fall – need to be borne in mind
The latest auction in the UK under the contract for difference (CFD) regime has once again helped significantly reduce the cost of electricity to be borne by consumers, but over the lifetime of a contract, asset owners need to bear in mind capture prices and their effect on merchant prices, an analyst suggests.
Aurora Energy Research project leader Weijie Mak told OWJ that the auction clearing prices of £39.6/MWh (US$49.5) and £41.6/MWh (US$52.0) attest to the decline in capex the offshore wind industry has achieved in recent years.
However, he said, this does not necessarily mean the need for subsidies of some sort is diminishing.
Instead, he said, it highlights the value of guaranteed revenue (from a contract for difference) when financing a project.
So attractive is this guarantee, he suggests, that developers are willing to pay a premium for a contract because it essentially acts as a form of insurance.
“Aurora expects offshore wind capture prices, and hence merchant prices, to be above the recent clearing prices over the duration of the contracts,” he explained, “but wind revenues are subject to significant uncertainty.
“A slump in commodity prices has seen offshore wind capture prices average in the mid-£30s/MWh in the last two months. Looking to the future, a potentially high build-out of offshore wind spurred on by the government’s decarbonisation agenda could rapidly increase price cannibalisation and reduce merchant returns below £39.6/MWh.”
Another important uncertainty hanging over all of the contracts awarded in the auction is the recent legal challenge launched by onshore wind developer Banks Renewables.
“Having to rerun a sealed-bid CfD auction would imply providing unsuccessful bidders with important information surrounding the auction’s clearing price,” he said. “That would have the effect of making a rerun of the auction even more competitive.”