Innovative Energy Consultancy Ltd
Innovative Energy Consultancy Ltd

Gov’t auction delivers significant fall in low carbon power cost

The government announced on 11 September that a range of new energy projects, set to provide 3.3GW of new low-carbon electricity capacity, have been successful in the latest competitive auction for renewable technologies.

The auction was limited to “less established” technologies, meaning some of the most familiar renewables like onshore wind and solar PV were ineligible to compete. The big winner in the auction was offshore wind, with two developers being awarded a guaranteed price of £57.50/MWh to build offshore wind farms for 2022-23.

The “Contracts for Difference” (CfD) auction effectively guarantees a price for power for successful projects that bid in the lowest prices. A generator party to a CfD is paid the difference between their “strike price” – a price (in 2012 money) for every unit of electricity they generate determined through the competitive auction process – and the “reference price” – a measure of the average market price for electricity in the GB market.

This is designed to give greater certainty and stability of revenues to electricity generators by reducing their exposure to volatile wholesale prices, whilst protecting energy users from paying for higher support costs when electricity prices are high.

In the last CfD auction in 2015, offshore windfarm projects won subsidies between £114 and £120/MWh, meaning that in two years, the level of support needed to enable deployment of offshore wind has fallen by over 50%. The three offshore projects that won contracts in this CfD round were the 950MW Moray East offshore windfarm, the 860MW Triton Knoll windfarm and the 1386MW Hornsea windfarm.

Increasing affordability

There had been market speculation that deeper water, construction risks, higher transmission and connection costs, and the exchange rate could all have been factors leading to higher offshore prices than in comparable European markets. However, it seems GB is now reaping the same benefits of acquired learning and greater efficiency in the wider European offshore wind market, which has a mature supply line, larger turbines, and valuable experience operating at sea.

A number of small incinerators and biomass combined-heat-and-power plants were also awarded CfDs at prices of between £40/MWh and £75/MWh. Their total capacity was approximately 150MW, the maximum allowed under auction rules set by the government. The 8MW Redruth Energy from Waste plant received the lowest level of support, at £40/MWh.

The competitive approach to allocating support has driven cost reductions in the renewable energy industry which is ultimately driving costs for consumers down. It is estimated that the capacity delivered in this auction cost up to £528mn/ year less than it would have in the absence of competition.

Minister for Energy and Industry, Richard Harrington, commented: “The offshore wind sector alone will invest £17.5bn in the UK up to 2021 and thousands of new jobs in British businesses will be created by the projects announced today. This government will continue to seize these opportunities as the world moves towards a low-carbon future, and will set out ambitious proposals in the upcoming Clean Growth Plan.”

Industry calls for future certainty

The significant fall in costs for renewables – ultimately leading to lower energy bills for consumers – has been hailed by a wide range of industry groups.

Trade association RenewableUK highlighted that the offshore wind prices announced are actually cheaper than the cost of new nuclear power and new gas-fired power stations.

RenewableUK’s Chief Executive Hugh McNeal said the government could aid the industry further by continuing to hold “fiercely competitive” auctions for future projects.

Rebecca Long Bailey MP, Labour’s Shadow Secretary for Business, Energy and Industrial Strategy welcomed the auction results, but criticised the government for not being clear that they are going to fulfil their promise to allocate £730mn to offshore wind and other renewable technologies. Long Bailey said: “This risks hurting consumers who are facing sky rocketing energy prices and weakens our capacity to tackle climate change.”

The trade group for the nuclear sector, the Nuclear Industry Association (NIA) welcomed the auction results, but highlighted that system operator National Grid believes that new nuclear will be needed under all future scenarios and there is a need for a balance of low carbon sources to meet energy demand. NIA Chief Executive Tom Greatrex added: “The pointless technology v technology debate we’ve heard from some today that pits nuclear against renewables risks the UK’s low carbon future. Without nuclear you will need back up, baseload gas or coal, and without renewables the same is true.”

Rob Lalor, Senior Analyst at EnAppSys, an energy consultancy, added that if the government truly wants to determine the cheapest forms of electricity, it should hold auctions where rival technologies such as wind and nuclear compete against one another, including balancing and network costs.

Future auctions?

In 2015 the government committed to make funding available for three CfD auctions in the Parliament, stating that up to 10GW of new offshore projects could be supported in the 2020s, giving clear scope for further auctions in coming years.

The significant cost reductions mean the auctions could deliver more for less. It remains to be seen whether government will curtail scheme costs or extend the 10GW ambition in light of the latest auction. This will determine whether the impact on business energy bills will be lower than forecast.