Slow drift to certainty over offshore wind projects

Offshore wind is a fascinating study of what’s going on in renewable energy generation development. There’s clear progress: Able’s massive £450m offshore wind base adjacent to the River Humber has been granted final approval for development. The plan includes production facilities for offshore wind turbine foundations together with assembly and handling areas. These facilities are critical to optimising marine logistics, and to de-risking the installation phase of offshore wind parks. 

But there has also been bad news. On the development front RWE will now not proceed with Atlantic Array and it seems Iberdrola’s Argyle Array has challenges which currently mean it will not proceed, a decision which is likely to be revisited as market conditions develop. It’s logical that some of the development sites won’t make the grade so in the scheme of things these announcements are not altogether surprising. 

In the case of offshore wind at least there is now a greater degree of certainty which should enable other elements of the supply chain to invest in the UK

Over the last few weeks, with the gradual publication of aspects of the government’s Electricity Market Reform and the Energy Bill receiving royal assent, things in the market have become clearer. Contracts for Difference (CFDs) are now replacing the Renewable Obligation (RO) as the new support mechanism for renewables. A key distinction is that under the RO, utilities have an obligation which they can meet by generating from renewable sources.  Historically this obligation has informed their investment priorities. Under CFDs this will not be the case and they are likely to invest elsewhere if the returns cannot be made to be attractive.  

The CFD mechanism links with the long awaited strike price deals, in essence guaranteeing the developer a price for electricity going forward. Strike prices for each renewable technology have now been confirmed (e.g. £155/MWhr for offshore wind and £105/MWhr for coal to biomass conversion).

In addition, the Government has established a mechanism to avoid delays to financial investment decisions on projects. These delays would otherwise occur while developers nail on project income by securing a CFD. The aim of the scheme is to enable developers to enter into an investment contract (with the government) ahead of the CFD process which should give the certainty developers (and their investors) need to make financial investment decisions (FIDs).

The mechanism has been played out by publication of a list of 16 projects which have met certain criteria. Each of the 16 projects was sent draft investment contracts. However, the Government has since whittled the list down to 10 projects which it says “are provisionally affordable under the budget caps”, though it says all are able to remain in the process until it is completed. The projects on this second list include Dong’s offshore wind projects at Burbo 2, Walney 3 and Hornsea (in JV with SMartWind), and Statoil and Statkraft’s offshore wind project at Dudgeon. It also includes biomass conversions (i.e. conversion from coal) at Drax, Lynemouth and MGT’s Teesside project. Conspicuously absent from the shorter list are the Scottish wind farm projects and Eggborough’s biomass conversion.

Meanwhile, the industry is working hard (as many will know) to implement the outcomes of the Offshore Wind Cost Reduction Task Force and The Crown Estate’s Cost Reduction Pathway, all aimed at reducing the levelised cost of electricity. 

All in all, although these events raise lots of questions, there is now a clear (if smaller than expected) pipeline of projects. The strike price is clear, measures are in place which should enable FIDs to be made in advance of settlement of CFDs, and the way is clearer for Able’s investment. In the case of offshore wind at least there is now a greater degree of certainty which should enable other elements of the supply chain to invest in the UK, which in turn will contribute to reduce unit cost.

Paul McQuillan is head of the Renewables Sector at EC Harris