The results of round five of the UK’s flagship renewable support mechanism, the contract-for-difference (“CfD”) were published on the 8 September 2023. This awarded 15-year, CPI-linked, strike prices to 3.7 GW of renewable technologies across solar PV, onshore wind, remote island wind, tidal stream and geothermal technologies, effectively guaranteeing the revenues generated over the contract term once the projects are operational. Critically, no offshore wind projects bid into the auction, a technology that has historically been the major beneficiary of the CfD, putting a significant question mark on the UK’s target to build 50 GW of offshore wind by 2030 and to decarbonise the electricity grid by 2035, or 2030 under a Labour government.
This comes at a time when the real-life impacts of climate change are being felt more than ever: temperature records have been broken across Europe and extreme weather events are more intense and more widespread: some have labelled this ‘Europe’s extreme summer’ following wildfires in Rhodes, Catalonia and Tenerife and flooding and rainstorms in Slovenia, Croatia, Austria and the Czech Republic. Whilst it is important not to confuse short-term weather with long-term climate trends, and factor in the contribution of El Nino, we can only ignore the fact that climate equals average weather for so long: the average is moving.
The reasons offshore wind has not participated in the most recent round are well-publicised: Vattenfall announced in July that it has suspended work on its 1.4 GW Norfolk Boreas offshore wind project citing cost increases of 40%, and Orsted, the UK’s leading owner and operator of offshore wind has pointed to increased costs and reduced appetite to invest in the UK. The administrative strike price, the maximum price bidders can achieve in the CfD auction, at £44/MWh (in 2012 prices), is simply not high enough given the increased supply chain costs and higher financing costs that projects are now subject to.
In addition, the UK’s recent intervention in electricity markets, through applying a tax on the excess profits of generators without any offsets for investment (as has been the case for oil and gas companies subject to a similar regime), may have eroded some confidence in wider government support for renewable generation. Offshore wind requires significant capital investment from global equity and debt providers. The UK’s is not alone in intervening in energy markets in response to last year’s material prices but is competing with aggressive policies that provide material support to renewables in the US’ Inflation Reduction Act and the European response across adaptation to state aid rules, the legislative proposals of the Green Deal Industrial Plan and the Recovery and Resilience Facility’s dedicated climate subsidies.
That 3.7 GW of other technologies were approved is positive: for auctions rounds two and three technologies other than offshore wind did not materially feature. A range of technologies: baseload and intermittent, established and developing, are needed if the UK’s targets are to be met. Other barriers to these technologies, however, still exist: the recent UK onshore wind planning reform does not go far enough, environmental barriers need to be considered for tidal stream, and challenges with access to grid connections remains a significant barrier to onshore deployment.
Across all asset classes we are responding to new paradigm of commodity costs, inflation and interest rates, that is a material and rapid difference to that which went before. Support for renewables needs to adjust as materially and rapidly otherwise the UK will cease its important role in leading the mitigation of climate change and miss the associated investment and economic growth opportunities. A failure to do so may result in a further paradigm shift requiring a response: a change to our climate: the future costs of adapting to which are likely to be significantly higher than providing support for the mitigation of such changes today.