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An offshore wind heavyweight, UK squares up to 'tough' 40-GW target

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Vattenfall's 90-MW Kentish Flats project, off England's southeast coast, was the U.K.'s largest offshore wind farm when it was completed in 2005, but is now one of the smallest.
Source: Construction Photography/Avalon/Contributor/Hulton Archive via Getty Images

Having pioneered offshore wind for more than two decades, installing more than 10 GW in its waters to date, the U.K. now finds itself at a pivotal moment as it shoots audaciously for an almost fourfold increase in capacity by 2030.

Getting to 40 GW will require critical reforms in policy, permitting and transmission, industry observers told S&P Global Market Intelligence, as well as a significant manufacturing and construction effort at a time when other countries globally are ramping up their offshore wind activities and competing for resources.

But in the U.K.'s favor are fortunate market fundamentals that helped it grow to become the world leader in the technology.

"We have the best resource and probably one of the best geographies for offshore wind in the world," Barnaby Wharton, director of future electricity systems at trade group RenewableUK, said in an interview. "We're very lucky that we have the North Sea, which is shallow and has great wind speeds."

A long journey

In the early days of offshore wind, the U.K.'s main challenges were about proving it works and bringing its costs down.

The technology is now proven: Offshore wind is already the U.K.'s leading source of renewable generation. And grid operator National Grid Electricity System Operator Ltd.'s latest "Future Energy Scenarios" report sees the sector growing rapidly to become "the backbone of [the U.K.'s] electricity supply in 2050," at anywhere between 70 GW and 113 GW, depending on the level of consumer and system change.

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Cost is also no longer a roadblock: In the government's latest renewables auction in 2019, offshore wind projects were awarded contracts at prices significantly below the market rate for electricity.

But quadrupling capacity in less than a decade brings with it new hurdles. "It will come down to whether we can get enough volume through the planning regime, and enough grid connections in time," Alon Carmel, managing director at FTI Consulting, said in an interview.

Offshore wind projects, deemed nationally significant infrastructure, require approval from the national government. On average, it takes about a decade to bring projects from conception to operation, Wharton said.

Grid connections are increasingly becoming limiting factors in permitting projects. Vattenfall AB, the Swedish state-owned utility, saw its approval quashed for its Norfolk Vanguard wind farm in February because of the impact its transmission infrastructure would have onshore. A decision on its sister project, Norfolk Boreas, which would use the same onshore connection point as Vanguard, was delayed until late 2021.

The U.K.'s approach to offshore transmission to date has seen generators build individual cables to connect their wind farms, but the government is examining a more coordinated system to hook up multiple projects to one single onshore landing point.

"Unfortunately, the end [power] user is not out at sea, so you've got to find … cost-effective ways to share connections between the next wave of mega-projects," Steve Read, managing director of Bridge Wind Management, an asset management company, said in an interview.

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Lacking visibility

To some, a more pressing issue than permitting is policy reform, with critics arguing that the U.K. lacks a long-term vision for supporting new renewables capacity.

The U.K. runs contract for difference, or CfD, auctions where renewables developers submit fixed-price bids for their electricity. The government either tops up, or claws back, revenue from generators, depending on whether the wholesale power price is lower or higher than a project's CfD price.

The CfD and earlier U.K. government support programs for renewables have been critical to the success of offshore wind, attracting well-capitalized utilities like Iberdrola SA, Ørsted A/S, RWE AG, SSE PLC and Vattenfall — which between them own nearly 8 GW of net wind capacity in U.K. waters, according to Market Intelligence data — and a range of low-cost-of-capital investors and banks.

"Without government intervention, we wouldn't be where we are now," said Gary Bills, regional director for Europe, the Middle East and Africa at consultancy K2 Management.

The third and most recent CfD auction took place in fall 2019; the next is slated to open later this year and will be the largest yet, at 12 GW. As it stands, there is no auction roadmap beyond that.

That means a significant number of projects in the U.K.'s offshore wind pipeline, which stands at more than 23 GW, do not know when they will be able to bid for contracts. About 5 GW of projects have secured CfDs but are yet to begin construction, according to RenewableUK.

"We need to make sure we have enough projects coming through in the CfD [auction]. The government goes from one CfD to the next without any real visibility," RenewableUK's Wharton said. Government officials did not immediately respond to a request for comment.

Seabed lease auctions for the next wave of offshore wind projects are also "not quick enough and not big enough," Bills said.

The Crown Estate, which manages the seabed in England and Wales, ran its first seabed lease sale in a decade earlier this year, but the capacity on offer was four times smaller than the last round, when industry interest was only a fraction of what it is today.

The latest round fetched sky-high prices and saw market newcomers outbid incumbent utilities. Oil giant BP PLC, in a joint venture with EnBW Energie Baden-Württemberg AG, won two 1.5-GW lease areas and committed to paying a total of £1.85 billion in option fees across four years until a final investment decision. The companies think they can bring the projects through planning and into operation within seven years.

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Manufacturing crunch

Beyond planning and policy, the capabilities and capacity of the U.K.'s offshore wind supply chain may be issues.

With offshore wind development ramping up globally, and projects being built in new markets like the U.S. and in Asia, wind-turbine manufacturers like Siemens Gamesa Renewable Energy SA, Vestas Wind Systems A/S and GE Renewable Energy could quickly become stretched.

Some manufacturers are opening new facilities in the U.K. to cope with the expected rise in demand for turbines. Still, developers could hit a crunch point before the end of the decade.

"It's a completely arbitrary date but everyone says they want to start construction in 2027. If there are going to be bottlenecks, that's where it will be," Bills said.

The same could apply to shipping vessels and wind-turbine components. But observers say the issue of supply chain capacity could be partially solved by introducing regular CfD auctions, allowing companies to know exactly what projects are coming down the pipeline and when.

Without that visibility, the 40-GW target might be at risk. Only two of National Grid's four Future Energy Scenarios foresee the U.K. achieving its goal by the end of the decade. The remaining two get there by 2031 and 2035.

"The 2030 target is tough to hit," FTI's Carmel said. "It's definitely achievable, but there are some big obstacles."