The price of offshore wind continues to fall dramatically. The UK government’s latest round of contracts for renewable generation have just been announced, and they show the costs of subsidies have halved in just two years, writes Bridget Woodman of the University of Exeter. This is good news, but there are downsides, Woodman notes. The scale of the projects concentrates power in the hands of a few very large developers. Courtesy The Conversation.
Cheap wind power is a great source of low carbon electricity, and it’s good news for politicians who may have been worried about subsidies bumping up household bills. But the scale of investment in offshore wind raises bigger, more systemic questions.
The contracts – known as Contracts for Difference (CFDs) – pay operators of renewable energy installations a fixed price per unit generated for 15 years, regardless of what happens to the actual wholesale price of electricity in that time. For operators, this removes a lot of uncertainty about investing in relatively new and expensive technologies such as offshore wind because the subsidy and a guaranteed market for their power mean they can be confident they will recoup their costs.
Contracts are awarded through an auction, where eligible developers bid against each other for projects being constructed in any given year. The projects with the lowest costs are awarded a contract, so ensuring the eventual cost to consumers is kept down. This is the second such auction for CFDs, and was limited to offshore wind, biomass, and energy from waste. More established technologies such as onshore wind and solar were excluded from the auction process.
The prices of the contracts awarded in this round are also so low that there must be the prospect that some of the projects are not actually built
The results compared with the first auction are pretty spectacular. In 2015, two offshore wind projects were awarded contracts at £120 and £114 per megawatt hour (MWh). Two and a half years later, two projects are priced at £58/MWh, while a third is £75/MWh. This is a 50% fall in the level of subsidy, and makes offshore wind significantly cheaper than new nuclear power (the equivalent contract for Hinkley Point C is around £93/MWh).
Offshore wind has dominated all three allocations of CFDs, with around 70% of the total awarded. In part this is because it can deliver on a much larger scale than other renewables; one of the new contracts is for a huge wind farm off the Yorkshire coast which could power up to 1.4m homes. It is also the result of the government’s shift towards an explicit industrial strategy that intends to use the development of offshore technology to stimulate economic growth.
More centralisation
But the scale of this will profoundly shape the country’s electricity system. As the proposed wind farms are as large or even larger than conventional fossil fuel or nuclear stations, the UK will continue to rely on relatively few individual plants. Renewables could of course mean lots of small-scale wind and solar farms, leading to a more decentralised system. But a big offshore boom will lead to more centralisation.
The level of investment needed to build an offshore wind farm is enormous, and therefore only open to a handful of large companies with access to the necessary funds. This reduces the potential for new entrants into the market, and excludes all the new investors who had begun to put their money into smaller scale, onshore projects over the past few years.
If Britain continues along this route, the days of community energy groups and energy co-ops may well be over
The prices of the contracts awarded in this round are also so low that there must be the prospect that some of the projects are not actually built. This is partly because the costs of turbines and cables might not decline as quickly as expected, but is also related to Brexit. A decline in the pound means the cost of importing the necessary materials might well increase to the point where the subsidy on offer is not enough to allow investors to recoup their costs.
While the impact of this might be relatively slight for a small scale, onshore project, it will be much larger for a complex, very capital-intensive wind farm built many kilometres out to sea. The UK could afford to lose a few smaller hilltop wind farms, but losing a massive offshore project would put a huge dent in its renewables output.
So, the decline in offshore wind costs is fantastic, and a real endorsement of a rapidly-developing technology. But the bigger picture shouldn’t be neglected here. The UK is putting a lot of eggs into one basket. Centralised generation increasingly excludes new entrants, and literally concentrates power in the hands of a few very large developers. That makes life easier for policy makers who have fewer firms to deal with, but concentration also increases the risk of collusion and, in the longer-term, will mean less innovation.
While increased generation from renewables is a desirable thing in itself, it is a real pity to be neglecting the increased levels of participation in the system which smaller scale projects offered. If Britain continues along this route, the days of community energy groups and energy co-ops may well be over.
Editor’s Note
Bridget Woodman is course director for the MSc Energy Policy course and a member of the Energy Policy Group in the School of Geography, University of Exeter. Previously she worked at Warwick Business School as a UKERC Research Fellow in its Infrastructure and Supply theme. has provided advice, reporting and consultation on energy issues for Green Alliance, European Commission, DTI, BERR and Greenpeace. Bridget has a strong focus on policy and regulatory aspects of delivering sustainable energy systems from a multidisciplinary perspective.
This article was first published on The Conversation and is republished here with permission of the author and under a Creative Commons licence from the publisher.
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Bob Wallace says
” the days of community energy groups and energy co-ops may well be over”
If the goal is to stop the use of fossil fuels then why is it important that small scale producers play a role? Don’t we want costs to be as low as possible in order to drive the transition as fast as possible.
Will innovation happen at the neighborhood level or at the level where there are millions of dollars available to research ways to make a company more competitive?
Collusion/corruption. If there’s a problem in the government that large energy problems might be using to their advantage that’s a problem with the government. It’s almost certain not going to be specific to one industry/sector.
Nigel West says
“The scale of the projects concentrates power in the hands of a few very large developers.”
That’s inevitable for off-shore wind. Communities would not step forward to develop big off-shore wind projects.
“The contracts – known as Contracts for Difference (CFDs) – pay operators of renewable energy installations a fixed price per unit generated for 15 years”
The price is not fixed, it escalates.
“Renewables could of course mean lots of small-scale wind and solar farms, leading to a more decentralised system. But a big offshore boom will lead to more centralisation.”
Why does the UK need a decentralised system? What advantages has that for the consumer – very few. The current Government wisely stopped further support for on-shore wind once the costs reached levels where support was no longer needed. “Lots of small scale wind” – the UK is already saturated with onshore wind which has spoilt areas of natural beauty. It was inevitable that wind power development would need to shift offshore.
“The UK could afford to lose a few smaller hilltop wind farms, but losing a massive offshore project would put a huge dent in its renewables output.”
I do agree that there is a risk of some projects not going ahead say if developers have little margin to accommodate unexpected extra costs. That might jeopardise renewables targets, but loss of expected renewables capacity will not threaten supply security.
“That makes life easier for policy makers who have fewer firms to deal with, but concentration also increases the risk of collusion and, in the longer-term, will mean less innovation.”
Only big developments and competition can drive down costs as seen recently. Fewer firms to deal with would be a competition matter, and collusion in an auction/tender process probably unlawful. Big off-shore developments are driving innovation e.g. 8MW wind turbines, with 12 MW ones in the pipeline.
Karel Beckman says
Well, there are certain advantages to a decentralised system. A centralised system means, as Woodman writes, putting a lot of eggs in one basket. This has security of supply risks and economic risks. Can offshore wind farms withstand great storms? Do we become overly dependent on a few large companies. Decentralised means citizens and small businesses can get involved. It makes for resilience. It can be economically attractive for people. It might lead to more employment. The author is not against offshore wind – she notes that there are risks and downsides to relying too much on offshore wind. See also my article The Growing Risks of Offshore Wind, https://energypost.eu/14694-2/
Nigel West says
I would agree that many wind and solar community projects provide more diversity. Possibly a feeling of enhanced security of supply too those who live nearby. But the majority depend on the grid for security due to intermittency.
I don’t think people should worry that a system dominated by generation concentrated say off shore or conventional stations is insecure. That is well managed by National Grid and the DNOs through system design and operational standards.
The UK is dominated by the big 6 suppliers. Government is threatening price caps. I would suggest those dominant suppliers, perhaps controlling prices, are more of a risk to consumers than large generating companies.
Offshore wind farms in the North Sea will take a battering from the weather so let’s hope the designers do a good job. If there are problems investors will be hurt, but UK supply security should not be affected by the long term loss of an intermittent source of generation.
Mike Parr says
“the UK is already saturated with onshore wind which has spoilt areas of natural beauty” – nonesense. The vast majority (70%) of on-shore wind is in Scotland – England (& Wales) is, relatively speaking, undeveloped. The various Hinkleys don’t do much for the Devon coast (ditto all the other nukes by the Uk seaside) but I don’t hear complaints about them.
Paul Hunt says
This switch from big fossil fuel-fired to large-scale offshore wind projects means that household and small business consumers will be ripped off by a slightly different set of corproate capitalists. Decentralised generation and local participation may work well in countries with decentralised governance structures. Germany is perhaps a good example. But the local authorities in England have been hollowed out by successive over-centralised governments to the extent that many, particularly those in areas that do not support the current government, are struggling to deliver even the most basic services. Their ability to engage effectively in energy generation and supply is negligible. Decentralised generation and supply are mainly for green fantasists and wealthy property owners seeking to capture even more economic rents.
Willem Post says
The capital costs for the cabling from the wind turbines to shore and then to connect to the grid, and any grid modifications are not included in the bid package.
That very significant capital cost will be socialized on user electric bills.
Karel Beckman says
Incorrect. In the UK developers have to pay the interconnection costs. They are included in the contract-for-difference price. In Germany, the Netherlands and Denmark the developers do not have to pay. In the Netherlands these costs are estimated at 14 euros/MWh.
Bob Wallace says
“That very significant capital cost will be socialized on user electric bills.”
If you were correct (Karel states that you are not) then nothing would be “socialized”, it would be “capitalized”.
Transmission costs would be included in the price of electricity and paid by the users in proportion to the amount of electricity used. That’s pure capitalism.
If you want an example of socialization of costs think about what would happen were one of the UK’s nuclear reactors to melt down. The resulting massive cost would be born by all UK taxpayers, even those who might purchase no electricity from the grid.
Nigel West says
In the UK energy industry it’s well understood that the term to socialise a cost means to spread it across the consumer base.
Socialising costs by spreading across a captive consumer base is far from being capitalism. Electricity is an essential service and transmission and distribution are monopoly services. Consequently they are essentially state controlled enterprises.
BTW Bob there is more chance of a nuke from NK hitting LA and US taxpayers picking up a massive cost than a UK nuclear reactor melting down. All but one of the operating UK civil reactors are gas cooled reactors so melt down risk is not a safety issue.
Bob Wallace says
“In the UK energy industry it’s well understood that the term to socialise a cost means to spread it across the consumer base.”
Is the cost being spread evenly across consumers or charged based on amount of electricity purchased?
All nuclear reactors are absolutely safe until they aren’t. I doubt we are through finding clever ways to melt one down.
Mike Parr says
The author posits a sort of either or scenario: “Renewables could of course mean lots of small-scale wind and solar farms, leading to a more decentralised system. But a big offshore boom will lead to more centralisation”.
The Danes publish data for their off-shore farms down to individual WTs. This shows significant assymetry in capacity factors, with the Oct to March months often having up to 85%. This fits quite well with elec demand. Summer months tend to be much lower 30 – 35. The inverse is true for PV – which continues to evolve downwards in price. There is no reason why community (& household PV) could not proliferate for the summaer (perhaps with battery storage to cover the evening & night) with off-shore wind doing the heavy lifting in the Oct – March period (plus distributed storage taking the sting out of ther evening peak). In this scenario everybody is a winner.