Treasury red tape could leave UK billpayers £1.5bn worse off each year once the government’s latest auction for offshore wind projects wraps up.
The Energy and Climate Intelligence Unit (ECIU) released analysis, detailing how, despite inflation making things harder, new offshore wind projects will still produce electricity at levels far cheaper than the regular wholesale electricity price. The cost of gas, for example, is due to stay two to three times higher than pre-crisis levels for the foreseeable future. This means that even in a situation where offshore wind costs climb to £60/MWh, it will still be substantially below the wholesale cost of electricity, which is anticipated to remain around £90-100/MWh.
Through the Contracts for Difference (CfD) scheme, these projects will be contracted at a lower price than the wholesale price, resulting in a saving for billpayers. Treasury rules, however, do not factor in forecasts of the gas price remaining high. They also place an arbitrary limit on the number of wind farms that can be contracted, meaning it the number of projects that can come through the auction will be constrained. Bills will still be high.
Even though the government bumped up the budget for this year’s auction from £170mn to £190mn, this is unlikely to make much difference to the outcome. It also ignores the fact that renewables save money, rather than add costs onto bills.
The inflexible rules already saw the previous auction round – AR4 – fail to max out its budget, with 1GW of wind power missing out. This could have provided £225mn in savings. AR5, meanwhile, could end up contracting just 2GW of offshore wind, when up to 7GW of power could have been secured, missing out on savings of more than £1.5bn per year. This will also obviously impact ambitions for 50GW of offshore wind by 2030.
The ECIU also pointed to supply chain constraints which are having an impact on the cost of building new turbines. This, when combined with high inflation, should have been a reason to alter the CfD maximum strike prices to be reflective of these challenges. This is something that in 2024, when the next CfD round takes place, should be looked at. Efforts should be made for it to adopt greater flexibility and reflect market changes, ensuring that the industry can keep pace with Britain’s net zero ambitions.
Jess Ralston, ECIU Energy Analyst, said: “ Government seems to be focussed on North Sea gas licences and tax breaks for oil companies that won’t bring down bills while tying up offshore wind farms that generate electricity cheaper than gas in red tape. What is going on? Even with inflation pushing costs up for offshore wind, it will still generate electricity much cheaper than gas power stations. Stifling wind farms pushes up bills. Treasury’s rules seem to be actively working against bringing them down.”
