UK offshore wind is not just about the turbines

November 2024 | EXPERT BRIEFING | SECTOR ANALYSIS

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On 3 September 2024, the results of the latest UK contracts for difference (CfD) allocation round were announced by the Department for Energy Security and Net Zero. This being the sixth time this has been run, it is known in the market as ‘AR6’.

Given the so-called ‘wake-up call to the government’ from the previous allocation round when no offshore wind projects were awarded a CfD contract, there was a sigh of relief in several government corridors when AR6 results were announced. It appears that increasing the prices that could be payable worked. So how does it compare to what is done before and what needs to be done next?

Firstly, it is worth noting that 131 CfDs were awarded – that includes over 3GW of solar (93 projects) and nearly 1GW of onshore wind (22 projects). Offshore wind also secured the highest capacity at nearly 5.3GW, with one project representing 400MW of floating offshore wind capacity. This reflects a significant increase in capacity for the 2026-29 period. Alongside offshore wind, six new tidal projects were awarded CfDs as well.

So what is the value of effectively driving power sector decarbonisation? Some would say that increasing the budget by over 50 percent from the original budget set in March 2024 and making it significantly higher than in the previous allocation round played a key role. Others question whether these costs are justified, given the current environment of depressed carbon prices and focus on energy security.

Undisputably, one of the key challenges facing renewable energy projects globally is that, while they tend to have lower operating costs over time, they often have high upfront investment costs. As project scale expands, initial investment amounts increase substantially and securing the requisite finance can take time. This is further exacerbated by several wider factors, which has meant that the cost of offshore wind turbines has increased by up to 40 percent in the last three years.

The reason for recent cost increases can, in part, be attributed to global interest rate hikes. Simultaneously, high inflation rates have had a knock-on effect to the cost of materials, including steel, copper and polysilicon, thereby raising the cost of construction. To add to this, supply chains are groaning under the strain of trying to meet various net-zero related targets which seem to be converging around the same end of decade date, while recovering from the aftershocks of the global pandemic.

Additionally, the growing global demand for materials and key components required to develop renewable energy projects has not been matched by an expansion of available locations for sourcing materials or manufacturing key components. In fact, most key components are still manufactured in just a few countries, which also places pressure on the availability of low-cost transportation.

This is why the results of AR6 are bittersweet. While securing over 9GW of capacity is clearly helpful for the UK’s power sector decarbonisation targets, of the 5.3GW offshore wind capacity awarded, 1.6GW went to projects already on their way to being developed. These projects are, as referred to in AR6 language, ‘permitted reduction’ projects.

When looking under the lid, one finds that most of the successful offshore wind projects in AR6 had originally bid two allocation rounds ago (in AR4) and so were, by bidding in AR6, looking to take advantage of the higher levels of support. From a price perspective, the difference between strike prices for AR4 (£37.35) and AR6 for permitted reduction projects (£54.23) represents a 45 percent price increase.

Furthermore, not all wind projects are created equal. While for floating offshore wind, the 400MW awarded went to Green Volt, approximately 250MW of floating offshore wind projects were unsuccessful (or chose not to bid this time around). Why this is the case likely depends on the level of support, but also on other timelines to which such projects may be working. That said, with the UK pushing toward leasing seabed areas solely to floating offshore projects, ensuring that the CfDs are sufficient for securing their development are key.

What then of onshore wind? Often mentioned as the cheapest form of renewable energy generation alongside solar, onshore wind had a glimmer of hope through having a budget to work with as part of this allocation round (alongside other established technologies like solar, which are part of the same so-called bidding ‘pot’).

However in the end, AR6 secured just short of 1GW. What is more, of those that succeeded, only 8MW of onshore wind secured a contract in England with 72.6MW secured in Wales, as compared to Scotland’s 909MW. Clearly, other factors, such as lack of ability to secure land and planning permissions, are driving onshore wind development further north of the British Isles.

The next piece of progress toward a renewables-driven energy system faces more complexity. Indeed, it will not have escaped anyone in the energy sector just how large the challenge is of upgrading and expanding grid capacity. The UK’s current grid infrastructure needs to be significantly improved, requiring substantial investment in infrastructure as well as digitalisation and technology to ensure consistent and stable supply.

It is crucial for the transmission system to be vastly extended to reach wind-exposed hilltops, remote islands and offshore windfarms far from the coast. It also needs to be upgraded to allow for the existing network to transport significantly increased power volumes. This requires billions of pounds of investment (the National Grid Electricity System Operator estimates it needs £58bn), a sustained and focused construction programme, a skilled and available workforce, as well as necessary funding to meet development and construction costs. Furthermore, akin to renewable power generation projects, materials and key components from a similarly constrained supply chain are also needed.

Beyond wires, upgrades to other key infrastructure such as port facilities, as evidenced by the latest Crown Estate Leasing Round in the Celtic Sea, and storage solutions will be pivotal. As more renewables come onto the transmission system, dealing with intermittency and long term storage requirements mean that backup generation, energy storage systems as well as seasonal storage using hydrogen are critical. Costs associated with addressing intermittency from renewables are already above £10m per month. Without greater investment into this part of the sector, this figure is only set to increase and become less manageable.

Now that AR6 is done, focus should be on ensuring sufficient investment is made where and when it is needed in order to deliver the UK’s net-zero ambitions.

Dalia Majumder-Russell and Vini Cowden are partners and Natasha Kenber is an associate at CMS. Ms Majumder-Russell can be contacted on +44 (0)20 7367 3634 or by email: dalia.majumder-russell@cms-cmno.com. Ms Cowden can be contacted on +44 (0)1224 267 150 or by email: davinia.cowden@cms-cmno.com. Ms Kenber can be contacted on +44 (0)20 7367 3617 or by email: natasha.kenber@cms-cmno.com.

Dalia Majumder-Russell, Vini Cowden and Natasha Kenber

CMS