Is wind technology facing an uncertain future?

Is wind technology facing an uncertain future?

The UK Government has announced plans for the next Contracts for Difference (CfD) auction, expected to take place next spring. Is there enough funding available to support developing offshore wind projects?

With a remaining budget of £557m (in 2012/13 prices) Utilitywise estimates that funding may not be able to cover all of the offshore wind projects currently in development, let alone provide support for any other technologies.

The next CfD auction is expected to focus heavily on offshore wind projects, with the Government eager to develop the country’s geographical advantage towards this technology. Offshore wind also faces less local opposition and environmental challenges than onshore wind. Onshore wind has been banned from entering the CfD auctions, although the next round will have an exception for projects within the Scottish Islands. This is due to the Government’s focus on what it defines as ‘less established’ technologies, and the application of onshore wind in this location fits their definition.

Growth in offshore wind across the UK is already set to accelerate from the current 6GW of capacity in operation. Just over 18GW of additional capacity is in various states of development, with 8GW of that already contracted with a CfD or FIDER subsidy agreement. A further 1.5GW is under construction (meaning the project has broken ground, so is likely to have secured funding arrangements).

All this leaves more than 8GW of offshore wind capacity up for grabs in the upcoming Capacity Market auction. However, if the clearing price in next year’s auction is similar to that in the previous auction – around £57/MWh – Utilitywise calculations show the cost of subsidising all of this capacity would exceed the £557m budget within the next decade, when the new schemes come online.

What if the Strike Price falls?

Should the offshore wind Strike Price fall to £55/MWh, which some reports indicate the technology could still operate at, then the budget could support around 80% of the planned capacity by 2030.

However, if costs fell even further, and the Strike Price can be set at levels equivalent to current wholesale prices of £50/MWh at the time of agreements, then this could support all of the in development offshore projects and 40% of the planned onshore sites. In this case, projects would effectively be zero-cost with inflation the main factor providing uplift.

Currently, there is 8GW of onshore wind capacity in differing states of development, only 0.7GW of which has already secured a CfD contract (this was in earlier auctions when the technology was still allowed to take part). Around 6.5GW of the remaining capacity has yet to begin construction and would likely be seeking a subsidy contract of some kind.

How will this impact you?

Based on the funds currently provided to the new auctions, regardless of the Strike Price, consumers are expected to face an increase on their electricity bills of around £2.50 to £3/MWh per year by 2030.

The cost to consumers could rise further if the Government wanted to support onshore wind while still pushing for the bulk of planned offshore to be developed, and if Strike Prices were higher than those noted above. This would need a larger budget for CfD contracts and would lead to additional costs, which would then require even higher bills to ensure customers pay for the increased green energy capacity.

Long-term price forecasting from Utilitywise

Utilitywise can help you remain informed of price increases and help you budget for any impact these auctions may have on your costs. If you’re uncertain about how to budget effectively for your energy costs then we have a solution for you; access year-on-year price projections for the next five years with our Long-Term Price Forecast Report.

This report calculates future energy prices which include the ever-increasing green subsidies, network costs, and taxes. To find out more about what the report details, and how it can be tailored to meet your specific needs, download our factsheet here.

Ross Moffat

Posted by on Wednesday, the 1. August at 14.15

Ross Moffat has been a part of the Market Intelligence team at Utilitywise since early 2014. His responsibilities include delivering Market Intelligence reports to clients and managing the Utility Insights Twitter account. Ross has a first class Honours degree in Business and Marketing from the University of Stirling.