Brexit uncertainty has slowed supply chain expansion in the UK and any future disruptions to trade will pose challenges to suppliers and project execution and could affect capacity awarded in Round 3
Brexit uncertainty has slowed supply chain expansion in the UK and any future disruptions to trade will pose challenges to suppliers and project execution and could affect capacity awarded in Round 3.
Wood Mackenzie Power & Renewables said it believes a hard Brexit will have a less severe impact on the offshore wind industry than other industry sectors. Even so, it said, the non-UK based supply chain will face an average World Trade Organization tariff of 2.7% plus a significant degree of uncertainty over labour, financial and legal perspectives until a new trading agreement is reached with the EU.
“There is a high degree of uncertainty over the UK’s future trading relationship with the EU and third states with which the EU has free trade agreements. The uncertainties raised by Brexit has slowed expansion of the UK supply chain,” the consultant said. “Any future trading barriers with Europe caused by Brexit will pose challenges to suppliers and project execution.
“In the short term, the potential import tariff and various uncertainties associated with hard Brexit is likely to cause a drop in the capacity awarded in the upcoming contract for difference (CfD) auction Round 3,” Wood Mackenzie said.
The third CfD allocation round is due to open on 29 May 2019. The final budget notice will be issued at least 10 days prior to the auction commencement date. The proposed draft budget for allocation round 3 (AR3) is £60M (US$79M) (less than 10% of the total Pot 2 budget £557M (US$736M)), with a capacity cap of 6 GW and the strike price cap for offshore wind set at £56/MWh (US$74/MWh) and £53/MWh (US$70/MWh) for 2023/24 and 2024/25, respectively (close to the lowest bid awarded in AR2, £57.5/MWh (US$76/MWh)).
Wood Mackenzie believes the potential import tariff and various uncertainties associated with hard Brexit are likely to increase the actual construction cost and weaken the initial evaluation of the project financial performance in the base case.Combined with the given strike price and the project delivery window, awarded capacity supported through the upcoming auction could drop.
“There should be greater clarity on a hard Brexit by the commencement of the next CfD allocation round. Considering decarbonisation as a long-term energy strategy, the impact of hard Brexit on the long-term growth of the offshore wind power industry in the UK will be limited,” Wood Mackenzie said.
The UK is the largest offshore wind power market in Europe with 8.2 GW of installed capacity through the end of 2018. Its leading position will continue over the next 10 years with another 19 GW of capacity forecast to come online.
The UK has been the most attractive market for large foreign suppliers to the offshore wind power industry and the UK remains tightly woven into the continental European supply chain.
Approximately 68% of the offshore wind supply chain is sourced currently from non-UK based firms.
“The growing scale of the projects and the interval between future tender rounds (bi-annual) in the UK means that exports will be key for the UK supply chain to alleviate the fluctuating nature of the build-out and optimise production utilisation,” Wood Mackenzie analysts said.
“Hence any trade barriers imposed by Brexit would have a detrimental impact on the UK supply chain. Similarly, free trade with continental Europe is also key for developers to mitigate the costs of project disruptions as it allows for reshuffling of installation vessels or suppliers.”