Why this week’s wind power auction could be a make-or-break moment in the UK’s net zero journey
Today marks the start of one of the most critical processes for the UK’s economy, political system and net zero journey.
The Contracts for Difference (CfD) Auction Round Six (AR6) process has the potential to make or break the success of the UK’s 50GW by 2050 and wider net zero journey, built on trying to future-gaze the would-be successes or failures of upcoming offshore wind projects.
Over the course of the coming months, developers and the government will, for lack of a better word, haggle on the financial viability of building projects to provide electricity.
But how do these auctions actually work?
The CfD scheme ensures developers of would-be projects receive a guaranteed price from the government based on the amount of electricity they will generate – known as the strike price.
When the strike price is above the market price of electricity, the government makes a top-up payment to generators.
However, if the strike price goes below the market price, generators are required to pay back the difference.
This is designed to ensure that developers achieve the price promised by the UK government.
Therefore, the main incentive for generators of offshore wind is the certainty that the CfD arrangement is supposed to offer by steadying an offshore wind project’s revenue and thereby reducing the risks associated with developing the project.
Why are they significant?
The UK’s offshore wind sector has been through a torrid time of late and the main reason why AR6 is a big deal in terms of the net zero journey is because the previous two auctions went so badly.
The AR4 process in 2022 resulted in the collapse of the Norfolk Boreas 1.4GW offshore wind project due to rising capital costs and supply chain price inflation.
This project was originally intended to provide electricity to 1.5m homes and may still be developed but with a likely delay of several years.
The AR5 auction in 2023 received zero bids from offshore wind developers, despite calls from industry for at least 8GW to achieve the Government’s offshore wind target.
What happens in the wind power auction?
Today, would-be developers will begin to submit their CfD application and accompanying evidence, which will outline the size and scope of their projects, including costs.
For the following two months, the Government and National Grid will review the applications and develop suggested strike prices for each would-be development, which will then either be accepted or declined by the developer.
Final outcomes will likely not be decided until July or August but could run into September should the energy secretary decide the government must put more money into funding into trying to drive the strike price up.
What could happen?
Despite being the second-largest offshore wind market in the world currently, the UK sector is facing something of a confidence crisis, built by the bruising taken in the last two auction rounds.
The energy sector’s number one criticism going into both of these rounds and in their post-mortems was that there wasn’t enough funding to create an attractive development incentive for companies to invest in and prove the net zero target to remain viable.
And now, even though the investment has been upped to £800m, there are still huge concerns that this will not be sufficient to bring the five would-be developers; SSE Renewables, Vattenfall, Orsted, ScottishPower Renewables and RWE, and their combined 12.2GW of capacity to market.
Gavin Watson, an energy partner at law firm Pillsbury, Winthrop, Shaw and Pittman, said AR6 is a “watershed moment” for the industry.
“Whilst AR6 has all the makings of an auction round fit for success, this is not the end of the story,” he told City A.M.
“Continued supply chain bottlenecks, expected spikes in steel demand and inflationary pressures are threatening to create significant headwinds for successful bids.
“Constrained cable supply is perhaps the most pressing supply chain challenge facing the industry in the short-term and with limited manufacturing capacity in a world rushing to electrify, these cables are likely to remain in short supply for many years to come.”
Adam Berman, deputy director of Energy UK, added: “2030 is fundamentally not far away when it comes to lead times on offshore wind and net zero.
“It is critical the government approaches AR6 with high ambition and should there be significant projects bidding in so the government should be prepared to increase the budget according to how many projects are available.”