The Department of Business, Energy & Industrial Strategy (BEIS) in the UK has embarked on what some analysts see as a high risk strategy that combines fast build out of offshore wind, further steep cost reduction and the lowest possible price to consumers.
Speaking to OWJ about the relatively small sum allocated to the next contract for difference auction in May 2019, Cornwall Insight senior consultant Tom Edwards said, “BEIS has been looking at other European auctions, that have cleared €40/50 (US$46-57) per megawatt hour (MHh) and believes there is still more cost reduction that can be achieved in the UK.
“BEIS believes that by rationing the amount made available for the auctions it can secure bids that are as competitive as possible. It has updated its administered strike prices (ASPs, the caps on strike prices bids by technology) and looked at what it expects the wholesale price to be in the future. The £557M (US$715M) is still there but the thinking is that prices in the UK can come down further and that parties bidding in the auction will be prepared to bid lower.
“We think that if there is sufficient appetite £60M could buy anything between 1.9 GW and 3.2 GW of new offshore wind at £56/MWh and £53/MWh, the ASP ceiling for offshore wind in these auctions. BEIS believes up to 4 GW can be bought assuming parties bid even lower than the ceiling. A lot will depend on the level of competition. Had more money been made available for the auction in May 2019, a lot more capacity could have been awarded but perhaps not at such a competitive price.”
Concerns have been expressed about whether some projects will be able to compete, given the unexpectedly small pot of money made available for the May auction. Mr Edwards noted that there are a relatively large volume of potential projects looking for a CFD, as there are 7.9 GW of consented projects which could bid into the auctions. However, he argued, a potential problem with the strategy BEIS has adopted might arise if prices have to increase again, for projects in deeper water or with higher transmission costs. Then there are potential issues such as the exchange rate and the effect that might have on the cost of projects in the UK.
“If the BEIS strategy works, then it will be good news for consumers. The risk is that parties can’t compete at the price levels that have been outlined,” Mr Edwards said.
The ASPs for the May 2019 auction were set at £56 per megawatt-hour for delivery years 2023-24 and £53/MWh for 2024-25. They might be expected to fall further for subsequent delivery years. BEIS takes the view that as costs fall it should be able to secure more generation than in the last auction at a lower cost for consumers.
“Despite these concerns, I think that 30 GW by 2030 is still do-able,” Mr Edwards concluded. “There are a lot of projects out there that are looking for contracts. That’s what BEIS is relying on.”
Bloomberg New Energy Finance senior associate offshore wind Tom Harries takes a more sanguine view of the small amount of money that BEIS has made available.
“High power price assumptions offset any concerns about a low budget. CFD design is as much about budget impact as it is about budget size,” he said. “And if the 6 GW cap on the capacity that can be awarded in the auction is met, that could be more offshore wind than the previous rounds combined.
“The government pays the difference between the market price and the bid price. A higher power price forecast means less of a top-up is required and there is more budget to go around.”