This morning the government announced that it has declined to support the building of new offshore wind farms that could have powered millions of homes, and reduced both our energy bills and our dependence on autocratic petrostates such as Russia and Saudi Arabia.
No announcement went out in those terms, of course – but the results of the latest round of contracts for difference (CfD) allocations, published this morning, amount to the same thing. No new offshore wind capacity will be built as a result of this year’s CfDs, at a time when energy security and carbon reduction could hardly be more urgent.
Offshore wind is our cheapest source of electricity, but the farms require very significant investments, and energy prices are volatile. Since 2014 the government has given the investors more confidence by offering support contracts, agreed between the supplier and a government-owned company, that effectively set a fixed price (an “administrative strike price”) for the energy produced. Below the strike price, consumers subsidise the supplier; above it, the supplier pays the government back. This has been a great success, so far: seven of the world’s ten biggest offshore wind farms are in UK waters.
Why has the process failed this year? The technical reason is that government has lowered its strike price for offshore wind to £60 per megawatt hour (confusingly, you might also see it as £44 – that’s because 2012 prices are used in the auctions). In previous years, strike prices were reduced but the cost of installing new wind power also fell, so the economics of building a new windfarm still worked out. This year, the opposite is true: energy firms tell me high inflation in supply chains, and higher borrowing costs have made it impossible to justify investment.
Perhaps the energy companies are being greedy? Obviously they want to make money, but there’s no profit in not building anything, and there’s plenty of evidence for their claims. Turbine supplier Siemens Energy has been losing almost a billion euros a month to tech problems and inflationary pressures. And wind farms are typically funded by debt – which, as anyone who lives in a building may have noticed, is a lot more expensive these days. Bear in mind, also, that the current wholesale gas price averages well over £100 per megawatt hour, and energy analysts Cornwall Insight predict it will remain there until at least 2028. More offshore wind would mean lower bills over time, even at a higher strike price.
Energy industry sources told me they have been alerting the government to the problem for some time (AR5 applications opened at the end of March) and suggesting possible solutions, which include extending the contracts to 20 years, or longer-term capital allowances for renewable investments – but so far, no deal.
The government’s failure to act is already bearing fruit. In July, work on a huge new windfarm off the coast of Norfolk, designed to power 1.5 million homes, was halted because the price its owner, Vattenfall, had bid last year meant there was no longer a business case to continue. The UK was making decent progress in its energy mix, with 40 per cent of electricity coming from renewables last year, but that progress has been derailed.
Is it fair to blame the PM? Sunak appointed Grant Shapps to Energy and Net Zero, a post in which Shapps lasted less than a year before failing up into Defence. More significantly, in today’s news we see the results of what Sunak calls a “proportionate and pragmatic” (translation: cheap) approach to the grand problems of energy security and climate change: at least a year’s delay to big projects that could have delivered cheap renewable energy, produced at home.
Perhaps Boris “Saudi Arabia of wind” Johnson could intervene, but he’s a bit busy: this week, as the UK bakes in unseasonal heat, Johnson has been appearing at a fossil fuel conference sponsored by Exxon and Shell. It’ll be up to Jeremy Hunt to try to fix this in November.