Driving down the cost of offshore wind

Two offshore windfarms have been successful in the Less Established Technology pot auction. These projects, in addition to the five projects (combined capacity of over 3 GW) that were awarded allocations in the Final Investment Decision enabling for Renewables (FIDeR) process in April 2014, means that the UK now has over 4 GW of capacity with CfD support.

Having been heavily oversubscribed by developers, the auctions have exceeded expectations in driving down the cost of renewable energy, with the final auction prices of £119 and £114 per MWh, well below the previously published strike price of £140 and confirms that offshore wind costs have fallen significantly.

This falling cost is said to be down to a number of factors including bigger turbines, larger projects, more efficient installation methods, increased supply chain capacity, cheaper capital (especially debt finance), a reduction of risk and just out-and-out competition

But, uncertainty remains on what will happen to projects that missed out on an allocation, whether there is enough capacity being built to warrant future investment in the supply chain, and what impact this will have on other technologies like new nuclear and marine, including tidal lagoons.

Whatever the reason, it’s been suggested that the cost of offshore wind in the UK will continue to fall and there is said to be strong evidence that future auctions will drop through the 2020 target of £100 MWh.

Johnny Gowdy, director of Regen SW, says this could lead in the next decade to a point of ‘price parity’ – when offshore wind and other renewable technologies can compete with the market cost of electricity.

Projected costs for offshore wind projects are also falling rapidly across Europe, as evidenced by the announcement that Vattenfall will build the 400 MW Horns Rev 3 offshore wind farm off the coast of Denmark with a headline price of only £75.49 per MWh.

It’s good news, but there are some risks and the next UK administration will need to consider how best to maintain the growth and efficiencies achieved by the sector, says Mr Gowdy.

One main factor to consider is that the success of the recent auction round was based not only on a projection of falling costs but that there were six projects with over 3.2 GW capacity vying for a relatively small capacity allocation which, in the end, produced just two winners and only 1.2 GW of capacity allocated. “Good for price competition,” says Mr Gowdy, “but those sort of odds are not good for developers who in order to have got to the point of applying for a CfD are likely to have already invested over £20m apiece to get their projects through planning”.

Despite this, the immediate offshore wind pipeline is still looking healthy so it’s likely that there will be enough capacity to make the next auction, expected in late 2015, a success.

Mr Gowdy says DECC should take note however that over 12 GW of capacity has already been withdrawn through cancelled and reduced projects, and it is certain that developers will now “reassess the viability of their individual projects in an era of increased price competition and expected falling costs”.

“If the next government has an ambition to see the UK offshore wind grow into the 2020s it will need to further convince developers and their investors to bring forward additional projects to restock the pipeline for future auctions,” Mr Gowdy concluded.

By Rachael Doyle