Report finds key policies could substantially increase UK offshore wind capacity

"The National Grid has already indicated it wants to remove barriers from balancing and ancillary markets that prevent other technologies from contribution to grid stability," says Hugo Batten

Last month, the energy market analyst company Aurora Energy Research published a report into the 'new economics of offshore wind' which, amongst other things, concludes that the adoption of two policy mechanisms designed to achieve greater offshore wind penetration 'should increase potential offshore wind capacity on the GB system up to approximately 30GW by the 2030s up from the 6GW of operational offshore wind on the GB system in 2017.'

So, what are the main themes of the report?  What policy mechanisms do the authors suggest?  And what are the broader implications of the predicted five-fold increase in capacity for stakeholders across the UK offshore wind energy industry?

According to report author Hugo Batten, Senior Project Manager - Commissioned Projects at Aurora Energy Research, the key finding of the report is that there is what he describes as an 'economically efficient route' to the generation of 30GW of UK offshore wind power by the 2030s. In his view, although a lot of other reports and sector scenario analysis exercises have argued that offshore wind can get to the 30GWlevel, they have tended to be 'either unclear about how you get there, or assume heavy ongoing government support.'

A key part of the report is a comprehensive summary and analysis of the potential role of two fairly complex policies, or bundles of policies, in achieving greater offshore wind penetration - providing zero-subsidy contracts for difference (CfDs) and allowing offshore wind to 'revenue-stack.'  According to modelling presented in the report, taken together these measures should increase potential offshore wind capacity across the British system by up to approximately 30GW by the 2030s - up from the 6GW of operational offshore wind in the GB system in 2017.

Amongst other things, Aurora believes that such impressive growth would help the country to reduce carbon emissions to approximately 60 g/kWh by the late 2030s and lower overall system costs by around 7% - equating to annual savings to consumers in the region of £1-2 billion per year by the 2030s. This equates to a saving on household electricity bills of ~£20 per year.  It also predicts that such expansion would limit the integration costs - or the 'cost of intermittency' - associated with the offshore wind’s system to £6-7 per MWh in the 2030s.

As Batten explains, the report was prepared in response to a complex set of changes across the entire renewable energy and offshore wind market.  These included, amongst other things, what he describes as 'very low' prices in the offshore wind CfD (Contracts for Difference) auctions and subsidy-free bids in the Netherlands and Germany, as well as the National Grid's moves to trial the participation of wind and solar energy in frequency response markets in 2018 and onshore wind bidding into the capacity market (co-located with hydro). According to Batten, although all these factors - when taken individually - are 'positives' for offshore wind, he argues that they present 'major challenges' for the industry at the same time.

In Batten's view, the main challenge is the impact of price cannibalisation at high levels of offshore wind penetration on the system - and he reveals that Aurora believed that an independent report supported with rigorous modelling was needed 'to help make sense of the changing offshore wind market.'

"We brought together stakeholders from across the industry – including government, academics, and developers – to get their input and feedback on our modelling and outcomes. We spent four months modelling offshore wind under a variety of policy regimes to understand how more offshore wind could be added to the GB system in an economically efficient way," he says.

"While one of the policies Aurora models - zero-subsidy CfDs - does assume government revenue-stabilisation, we outline in the report why we think this should be cost-neutral to government over the 15 year life of the CfD," he adds.

In terms of the detail around the policies, Batten believes that the main item to note is that Aurora is not suggesting 'any major change of direction in policy' - and he points out that the government has already 'indicated it is willing to continue to support offshore wind, as long as that support is cost-neutral over the life of the contract - zero-subsidy CfDs.'

"The National Grid has already indicated it wants to remove barriers from balancing and ancillary markets that prevent other technologies from contribution to grid stability," says Batten.

One of the key methodologies Aurora made use of in compiling the report was its in-house GB energy dispatch model.  As Batten explains, all the team needed to do was adjust the parameters of the existing model so that it was capable of modelling offshore wind as a technology that could be built 'endogenously' in the model.

"In other words, based on its own technical, operational, and financial profile, does it build in the model when competing against all the other technologies that have to compete to get built in the capacity market?  And in our modelling, it does if the two policies we describe are enacted," he says.

In terms of how best stakeholders in the offshore wind sector should go about acting on the conclusions of the report, Batten says the major piece of advice the company would offer is that 'the economics of renewables are changing rapidly' – and that 'subsidy-free and zero-subsidy renewable assets will act in different ways to subsidy-backed assets.'

"The industry and regulators need to get ahead of the challenges to facilitate more renewables, and thus help decarbonise the power system, in an economically efficient way that reduces consumer power bills and minimises system integration costs.  We think the two policies we outline here could make a major contribution towards meeting those goals," he adds.

By Andrew Williams

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