After much speculation about when and if it would do so, the UK Government has made an important commitment to new auctions for future offshore windfarms. Commenting on the UK budget speech on 16 March 2016, RenewableUK’s deputy chief executive Maf Smith said. “We welcome the chancellor’s announcement that funding will be available for future rounds of competitive auctions to support offshore windfarms. The budget is tight, but we’re up for the challenge. We are confident that today’s announcement will deliver 3.5GW of new offshore wind capacity between 2021 and 2025.
“This budget shows that offshore wind will be cheaper than new nuclear power and competing with gas by 2025, making it even better value for money. The industry is playing its part continuing to drive down costs relentlessly – we released a report this week showing in detail how we’re ahead of what was predicted,” he said. “Today’s announcement will increase confidence, attracting billions of pounds of investment in the UK’s supply chain. It is long-term commitments such as this that will keep the UK as the number one destination in the world for investors in this technology.”
Shortly after the decision was announced in the budget, Chris Willow, an associate director at BVG Associates, said the budget statement contained some long-anticipated clarity on the support offshore wind can expect to receive in the next decade but also revealed a stark reality for the UK offshore wind industry – it has until the middle of the 2020s to reach cost parity with combined-cycle gas turbines (CCGTs).
“For projects being commissioned in 2021, the government has capped the strike price for a contract for difference (CFD) at £105/MWh. Our modelling suggests this is equivalent to a levelised cost of energy (LCOE) of £97 to £100/MWh, depending on factors such as project lifetime and the cost of capital. For projects being commissioned in 2026, the strike price falls to £85/MWh, which is equivalent to an LCOE of £80 to £82/MWh. Note that all these costs are in 2011/12 prices,” he explained.
“This level of support shows the government is pushing the industry to go beyond its previous expectations of what could be achieved. In the 2012 Offshore Wind Cost Reduction Pathways Study, The Crown Estate said the industry should reach an LCOE of £100/MWh for projects reaching final investment decision (FID) in 2020 if it had confidence in a market of sufficient volume.
“Assuming the lag between FID and commissioning is approximately three years, the government now expects the industry to reach this milestone two years ahead of schedule and with a significantly smaller market volume than industry had said was needed. The main reason why this has been possible has been the faster than expected uptake of larger turbines, accelerating LCOE reduction. Importantly, there is still the challenge that this progress in turbines masks slower cost reduction in other areas of supply due to the lower market volume and visibility.
“Looking to projects with FID in 2023 that will be commissioned in 2026,” said Mr Willow, “our modelling shows the strike price of £85 per MWh would take offshore wind to approximate parity with the LCOE of CCGT (based on the most recent DECC forecasts of gas and carbon prices). As CCGT is currently the most viable large-scale generation technology, this effectively means offshore wind can be seen as ‘subsidy free’ by this point. These announcements have established a new landscape for the UK’s offshore wind industry. Developers will either be able to hit the government’s new cost curve towards cost parity, or their projects do not get support. There are a number of reasons, however, why the industry is likely to welcome this latest news. Firstly, it gives some visibility of activity beyond 2020, which should help the supply chain to make some level of investment in infrastructure and equipment. Secondly, it is robust, independent evidence showing that offshore wind is on a path towards becoming subsidy free.
“Having led much of the industry engagement and modelling for The Crown Estate’s 2012 study, our latest modelling also now suggests that industry will actually have a good chance of exceeding these aggressive new targets. It is worth noting, however, that this level of LCOE reduction will be dependent on the ongoing development of a sustainable UK market. Realistically, this needs to involve at least 1GW of deployment a year with up to five years of project-scale visibility and a longer-term market-scale logic of how offshore wind, with its cost trajectory, fits with other technologies on their cost trajectories. We anticipate that the government will give more clarity on these issues in its next carbon budget.”
At about the time that the budget statement was made, a new report has provided strong evidence that the cost of energy from offshore wind continued to fall through 2015 and remains on track to deliver the target of £100/MWh by 2020. It also identifies forthcoming announcements on timing and scale of future CFD auctions and long-term capacity requirements as key enablers of further cost reduction.
The second annual Cost Reduction Monitoring Framework (CRMF) report, delivered by the Offshore Renewable Energy Catapult on behalf of the Offshore Wind Programme Board, shows that investment in turbine technology has delivered significant cost benefits, but further reduction will need to come from the innovations in ‘balance of plant’, such as foundations, cables and substations.
Investment in research and development and manufacturing industrialisation to deliver such improvements, the report warns, will only come with greater visibility of future rates of deployment and market size as the government sets out details of contracts for new offshore windfarms. The report was released at the same time as the UK Parliament reviews the fifth Carbon Budget of the Committee on Climate Change, which projects that offshore wind costs will be below new nuclear and new gas plant by 2025.
UK energy minister Andrea Leadsom said, “The UK offshore wind industry continues to go from strength to strength, and I’m delighted to see further evidence that costs are continuing to come down. Reductions in cost will mean better value for hard-working bill payers and are essential if this industry is to thrive.” Benj Sykes, industry co-chair of the Offshore Wind Industry Council, said, “We have continued to see excellent progress in reducing the cost of clean energy from offshore wind. The industry is fast-tracking adoption of new innovation in turbine design and in project operations, putting us ahead of the curve in efforts to bring down the cost of offshore wind. We are very confident that we can not only reach our £100/MWh milestone but go beyond this to become fully cost competitive with other generation technologies. We welcome the UK Government’s continued strong support for the offshore wind sector, recognising it as a major contributor to the nation’s future energy mix. The report shows that further clarity on the timing and volume of future CFD auctions, and the longer-term capacity requirements out to 2030 and beyond, is essential for the industry to galvanise the activity that will deliver further innovation and cost reductions.”
Of the 13 cost reduction indicators in the report, all but one is ahead or on target with the milestone set for 2015. The only measure that is behind target is growth and scale. Findings show that industry has already adopted innovations that were not previously expected to significantly drive cost reduction until 2017, particularly in the areas of turbine design and project maintenance. The report also assessed the degree of confidence that the industry has in delivering further cost savings. It found high confidence of delivery in eight of the indicators, with medium confidence in a further three, to achieve the milestone of £100/MWh in 2020. Such confidence has brought a commitment from the government to work with the industry on agreeing a new, ambitious cost-reduction target for the 2020s.