Offshore wind

UK offshore wind – leading the renewables price decline

Offshore wind prices have dropped by half over the past two years in the UK.
Published: Thu 14 Sep 2017

Renewables prices are dropping fast, with increasing economies of scale and competition as developers look to secure their projects.

Engerati recently reported a 40% reduction in solar-storage prices within two years for projects tendered on French islands and overseas departments.

Offshore wind prices

But even more striking is the drop in prices for offshore wind achieved in the latest contracts for difference (CfD) auction in the UK, marking a 50% decline over the past two years since the first auction in 2015.

At the time of the 2016 budget in March of that year when the CfD funding was allocated, the cap was set at £105/MWh, falling to £85/MWh for projects commissioning by 2026.

For the project due for phase one delivery in 2021-22 the price is £74.75/MWh, while for the two projects due a year later in 2022-23, the price will be as low as £58/MWh (all 2012 prices).

In the previous auction, the prices for the two offshore wind projects commissioning in 2017-19 were close to £117/MWh

A similar price drop can also be assumed for advanced conversion technologies, reaching £74.75/MWh in 2021-22 and for one project £40/MWh in 2022-23.

Contracts for difference for renewables

The CfD was introduced in the UK as a mechanism to drive investment in low carbon technologies.

Under this mechanism, a generator is paid the difference between the price for electricity reflecting the cost of investing in the particular technology – termed the ‘strike price’ – and the average market price for electricity in the national market – or the ‘reference price’.

By reducing exposure to volatile wholesale prices, generators gain greater certainty and stability of revenues, while consumers are protected from paying for higher support costs when electricity prices are high.

While the UK government received a good deal of criticism for its handling of subsidies for renewables, the CfD on the other hand seems to be successful and is achieving its aim.

Overall, the 11 projects awarded allocations in the auction are worth up to £176m per year. According to a government statement, due to the competitive nature of the auction, the capacity delivered cost up to £528m per year less than it would have in the absence of competition.

WindEurope CEO, Giles Dickson commented in a statement: “The UK’s CfD model has proved to be effective, providing revenue stability, lowering the cost of finance – and above all reducing costs to energy consumers.”

He adds: “The remarkable results of this latest UK CfD highlight the great strides made by offshore wind in recent years.”

New offshore wind capacity

The 11 projects in the latest CfD auction comprise a total of 3,346MW of new renewable capacity with the ability to power some 3.6m homes. Of these, offshore wind makes up the majority at 3,196MW. The remainder is split between biomass with CHP (85.6MW) and advanced conversion technologies (64.3MW).

The three offshore wind farms are the Innogy and Statkraft 860MW Triton Knoll farm off the coast of Lincolnshire, DONG Energy’s 1,386MW Hornsea Project 2 out in the North Sea and EDP Renewables’ 950MW Moray Offshore East off Scotland’s northeast coast.

These allocations to these projects further cement the UK’s leading role in offshore wind.

According to WindEurope’s latest offshore wind statistics, at the end of 2016 the UK had almost 5.2GW of installed offshore wind capacity. This was over 1GW more than the next country, Germany, and accounted for almost 41% of the 12.6GW total installed capacity in Europe.

The report also notes that while there was a dip in new capacity in 2016 due to consenting delays, the UK has a strong project pipeline with significant capacity additions over the next five years. These additions should account for 50% or more of new projects in the region this year and through into 2018 and also in 2021.

Investment in the UK’s offshore wind sector up to 2021 is expected to total £17.5bn, according to the government statement.

Europe’s offshore wind

Although no details are available yet, a third CfD auction is anticipated during the current UK parliament, which should see offshore wind prices going lower.

There certainly appears to be potential. According to WindEurope, offshore wind is expected to produce 7% to 11% of the EU’s electricity demand by 2030. However, this is only a fraction of the resource potential available in the region’s three sea basins – the North Sea, Baltic and Atlantic Ocean.

In a new resource assessment study, WindEurope finds that offshore wind could in theory generate between 2,600TWh and 6,000TWh per year – between 80% and 180% of the EU’s projected total electricity demand – at an average cost of €65/MWh or below by 2030.

Moreover, utilising the most favourable locations up to 25% of the EU’s electricity demand could be met by offshore wind energy at an average of €54/MWh by 2030. These include locations in the UK, Denmark, Netherlands, Germany and France. Add in Ireland, Poland, Latvia and Lithuania to span all three sea basins and the use of floating wind, the projected cost lowers to €51/MWh.

To achieve such a level of offshore wind, WindEurope’s Dickson has called for “ambitious commitments” from Europe’s governments on future deployment volumes, saying: “To sustain these cost reductions the industry needs to be able to plan ahead, especially for the period post-2020 (when member states complete their renewable energy action plans).”

He advises: “Crucially [the industry] needs at least three years’ visibility on the timing and volume of auctions”.

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