Boost for offshore wind as government raises maximum prices in renewable energy auction

The government has increased the maximum price for offshore wind projects in its flagship renewables scheme to further cement the UK as a world leader in clean energy.

Following an extensive review of the latest evidence, including the impact of global events on supply chains, the government has raised the maximum price offshore wind and other renewables projects can receive in the next Contracts for Difference (CfD) auction to ensure it is performing effectively.

The CfD scheme ensures renewable energy projects receive a guaranteed price from the government for the electricity they generate, encouraging continued investment in the UK – which is already home to the world’s 5 largest operational offshore wind farm projects and has increased electricity generation from renewables from 6% in the first quarter of 2010 to 48% in the first quarter of this year.

The maximum strike price has been increased by 66% for offshore wind projects, from £44/MWh to £73/MWh, and by 52% for floating offshore wind projects, from £116/MWh to £176/MWh ahead of Allocation Round 6 (AR6) next year.

This will help ensure projects are sustainably priced and economically viable to compete in AR6, building on the success of previous CfD auctions. These have so far awarded contracts totalling around 30GW of new renewable capacity across all technologies since 2014.

In AR6, offshore wind will also be given a separate funding pot in recognition of the high number of projects ready to participate. This will ensure healthy competition among a strong pipeline of projects, helping the UK deliver on its ambition of up to 50GW of offshore wind by 2030, including up to 5GW of floating offshore wind.

First established nearly a decade ago, the CfD has helped reduce the cost of renewables. It aims to deliver good value to electricity consumers and drive down costs. The government’s ambitions will create tens of thousands of new jobs by 2030, while also delivering the Prime Minister’s priority of growing the economy.

See Contracts for Difference (CfD): Allocation Round 6.

The government is also today (Thursday 16 November 2023) publishing developed proposals to review applications from the 2025 auction not just on their ability to deliver low cost renewable energy, but also on how much a project strengthens the environmental and economic sustainability of the industry. As part of this, a project’s social impact will also be considered – including how supply chains affect jobs and communities.

Energy Security Secretary Claire Coutinho said:

The UK is home to the world’s 5 largest offshore wind farms projects.

Today we have started the process of our latest Contracts for Difference auction for renewables, opening in March next year. We recognise that there have been global challenges in this sector and our new annual auction allows us to reflect this.

This is a vital part of our plan to have enough homegrown clean energy, bringing bills down for families and strengthening our energy independence.

Minister of State for Energy Security and Net Zero Graham Stuart said:

Last year’s Contracts for Difference scheme saw more than 90 clean, homegrown energy projects and today we have shown our ongoing commitment to retaining our global leadership in renewable energy.

This critical update to the scheme’s design provides further clarity and confidence to the offshore wind sector and ensures the scheme remains competitive for renewable developers investing in new low carbon technologies.

I look forward to securing another year of successful contracts in 2024, creating skilled jobs, reducing emissions and delivering maximum amounts of reliable clean energy for the British public.

Exchequer Secretary to the Treasury Gareth Davies MP said:

This scheme has played an indispensable role in driving forward renewable energy projects.

Supporting industry to make investments in renewable energy is essential to achieving our net zero goals, vital to attracting investment to our coastal communities, supporting jobs, and levelling up the country. I am proud to see Britain remain at the helm of green energy innovation as we move ahead.

The government is also increasing maximum bid prices for other technologies, offering certainty for developers, and keeping the UK at the cutting edge of all renewables. These include:

• geothermal by 32% – from £119/MWh to £157/MWh
• solar by 30% – from £47/MWh to £61/MWh
• tidal by 29% – from £202/MWh to £261/MWh3

Contracts for Difference are currently awarded based on the outcome of a competitive auction.

The consultation published today invites views on how Sustainable Industry Rewards, formerly non-price factors, could be incorporated into the 2025 auction process. This would be for offshore wind and floating offshore wind companies and would mean additional payments if they reduce the carbon emissions in their supply chains, or if they improve their social benefits, ensuring AR7 is the cleanest and most impactful auction yet.

See the consultation: Introducing a Contracts for Difference (CfD) Sustainable Industry Reward.

This could be done by investing in high-skilled jobs, using more environmentally friendly factories to assemble components, such as wind turbines, investing in new manufacturing facilities or skills in deprived areas, or finding new, innovative ways to reduce their carbon emissions, for example.

Building a more secure energy future will increase developer confidence in the sector every year. It will also enhance the UK’s reputation as one of the most attractive places to invest in renewables.

The introduction of annual auctions last year means project developers now have more frequent opportunities to participate. This also allows the government to respond more quickly to ensure the scheme continues to support the sector, maintain investment and continue its success.

The government is also taking significant steps to ensure homes and businesses across the country can access the electricity produced from these new renewable projects by accelerating grid infrastructure and connections. A Connections Action Plan will be published later this year to reform the connection process and reduce connection timescales.

RenewableUK’s Chief Executive Dan McGrail said:

Ensuring that the UK continues to unlock investment in renewables is critical to improve Britain’s energy security, drive economic growth, support thousands of new green jobs and enable us to continue to create a lowest cost electricity system for billpayers. With intense international competition for investment in renewables, we welcome the strong commitment to the sector shown by government today, which demonstrates that the UK is intent on remaining a global leader in offshore wind, as well as innovative technologies like floating wind and tidal stream.

There is the potential for the government to attract a record level of private investment in offshore wind projects next year, with at least 10 projects likely to be eligible, able to power 8.5 million homes each year and reduce the UK’s need for gas by 39%. The framework they’ve set out today is a significant step forward in securing this. Although renewables haven’t been immune from the recent rises in financing and supply chain costs which all major infrastructure projects have faced, they remain the lowest cost means of generating new electricity. Even at these new prices, there is still no cheaper way to meet the UK’s rising electricity demand and increase our energy security.

Emma Pinchbeck, Energy UK’s Chief Executive, said:

Offshore wind is the flagship technology for the UK in terms of meeting our net zero targets. It’s also a critical one to ensuring our energy security through generating more clean domestic power – at the same time as boosting our economy and creating jobs. So we very much welcome the government responding to the increased global competition and the economic challenges facing developers by showing more ambition and giving greater confidence to investors, which will help build a domestic green powerhouse that benefits our own economy and people.

Wider stakeholder commentary

Tom Glover, RWE UK Country Chair, said:

RWE welcomes the government’s decision on the administrative strike prices for renewables technologies bidding into Allocation Round 6, and its recognition of broader international global supply chain and inflationary cost pressures within the clean energy sector. We also welcome the decision to revert to a separate allocation pot for offshore wind for Allocation Round 6, which should help to secure future capacity towards the UK’s 50GW by 2030 target.

The timely and efficient deployment of renewables remains the lowest cost and best way of achieving the UK’s domestic energy security, as well as net zero. Today’s announcement represents a positive step towards maximising the UK’s clean energy potential, for ensuring sustained lowest prices for consumers and creating good quality jobs.

Keith Anderson, Chief Executive of ScottishPower, said:

Bringing more green energy onto the system is the single most important thing we can do to cut customers’ bills and strengthen our energy security. This is a welcome signal that the government is listening and is committed to getting the UK’s pipeline of offshore wind projects moving again.

The real test of that ambition will come when the overall budget for the next auction round is set next year. But, no doubt about it, this is a step in the right direction.

Chris Hewett, Chief Executive of Solar Energy UK, said:

The Contracts for Difference system has been a major factor in the growth of the UK’s solar power sector, by providing investors with secure and reliable incomes. Solar remains the cheapest source of power in the UK, according to the government’s own figures, although lately installation costs have been affected by factors outside the control of the industry, notably the war in Ukraine. So it is gratifying that that the maximum bid price has been raised by a significant amount, which should bolster growth further towards reaching the capacity target of 70GW by 2035.

Duncan Clark, Head of UK Region at Ørsted, said:

We welcome this important and positive step towards getting the next auction round right, which is essential for both UK energy security and the wider supply chain. This is a clear indication from government that offshore wind can and will be the backbone of our future energy mix – providing low-cost, low-carbon electricity, creating jobs, supporting communities and attracting investment into the UK.

Alistair Phillips-Davies, Chief Executive, SSE plc, said:

Securing enough projects through the next 2 auction rounds will be critical if the UK is to deliver on its stretching renewables targets and we therefore welcome today’s announcement which is an important step towards this goal. We now look forward to continuing to work constructively with the UK government on further details related to next year’s auction, as well as on wider issues such as consenting, in order to ensure as many projects as possible are able to bid for contracts to drive the right outcomes for consumers, energy security and the climate.

Halfdan Brustad, VP UK Renewables at Equinor, said:

When it comes to offshore wind, the UK is Equinor’s most important market. Equinor, like the UK, is committed to becoming net zero by 2050. DESNZ’s published AR6 parameters reflect the changing economic conditions for domestic renewable energy production including both bottom-fixed and floating offshore wind, which is warmly welcomed by Equinor. In a globally competitive environment, ensuring the right CfD parameters enables the UK to remain one of the most attractive markets to develop offshore wind.

Matthieu Hue CEO at EDF Renewables UK, said:

Today’s announcement on the Administrative Strike Price levels is very welcome news, and is a step in the right direction to putting the UK back at the forefront of renewable deployment.

The Contract for Difference is fundamentally a good mechanism, and a sustainable administrative strike price will drive investor confidence, economic growth and lower electricity bills.

It is encouraging that the concerns raised by ourselves and the rest of the industry in recent months have been listened to and we look forward to seeing further detail on the budget parameters over the coming year to match the ambition of today’s announcement.

The framework set out in relation to floating wind places us in a strong position to start to realise the many benefits that this emerging technology offers. The most advanced projects, such as our Blyth 2 Demonstrator, will enable the UK to secure a head start in the global race to develop floating wind.

Claire Mack, Chief Executive of Scottish Renewables, said:

Industry has repeatedly warned of the cost pressures facing our industry so we’re pleased the UK government has responded by delivering strike prices which should go a long way to restoring investor confidence in the Contracts for Difference scheme as a viable route to market for offshore wind.

As well as the social, environmental and economic benefits that renewable energy projects can deliver, bringing forward more of these developments will not only deliver affordable electricity and savings to bill-payers but will improve energy security and reduce consumer exposure to high, volatile gas prices.

It is therefore now essential that the UK government provides a budget for Allocation Round 6 which aligns with Scotland’s renewable energy ambitions and maximises the number of projects which can be successful in winning contracts to deliver clean power for consumers.