
| Norwegian energy firm Equinor's Dudgeon offshore wind farm in the North Sea. |
The next wave of offshore wind projects in the U.K. will be delivered at prices significantly below the market rate for electricity, in a development that underscores the rapid improvements in the cost of producing renewable power.
The U.K.'s third contracts for difference, or CfD, auction cleared at between £39.65/MWh and £41.61/MWh, in 2012 currency, with 15-year contracts handed out to nearly 5,500 MW of offshore wind projects, according to results released by the government Sept. 20. Just five years ago, the state was signing bilateral offshore wind contracts as high as £150/MWh.
"Considering where we were even a few years ago, this is quite amazing in terms of cost reductions," said Rebecca Williams, head of policy and regulation at industry group RenewableUK.
Winning bidders include U.K. utility SSE PLC, which was awarded a contract for its 454-MW Seagreen Phase 1 offshore wind farm and, in a joint venture with Norway's Equinor ASA, three projects totaling 3,600 MW in the Dogger Bank zone. Innogy SE — whose renewables business was acquired this week by RWE AG as part of a complex asset swap with E.ON AG — was successful with its 1,400-MW Sofia project.
For the utilities, the win marks a big step forward in offshore wind. SSE's owned capacity would balloon more than five-fold from just over 500 MW today, while RWE would more than double its fleet from a base of around 2,300 MW, including other confirmed projects, according to analysts at Alliance Bernstein.
SSE was unsuccessful with its onshore Viking wind farm, a project with up to 457 MW in the remote Scottish islands. Offshore developers that either confirmed they were taking part in the auction or had consented projects ready to go include Spain's Iberdrola SA, a joint venture between utilities EDP - Energias de Portugal SA and Engie SA, and China's SDIC Power Holdings CO. LTD. The next CfD round is expected in 2021.
The auction was open only to so-called less established renewable technologies, excluding onshore wind and solar photovoltaic. As well as offshore wind farms, which are due to come online between 2023 and 2025, contracts were awarded to four wind projects on remote British islands totaling 275 MW and two advanced waste conversion plants totaling 33.6 MW.

Record low prices
The latest prices not only beat expectations across the industry but also came in at levels below the government's reference prices — the estimates used in the CfD to forecast the future market price of electricity. For offshore wind, these started at £48.13/MWh for 2023/2024, increasing to £51.23/MWh by 2026/2027.
The result means that, instead of being subsidized by the government, successful projects will pay back the difference whenever the market price is above the price of their contract. National Grid estimates the difference could be as much as £246 million by 2026/27.
But James Brabben, wholesale manager at consultancy Cornwall Insight, cautioned that captured wholesale prices of wind farms will keep falling as more projects come online, meaning market rates could drop far enough during low-demand periods to still make subsidy payments necessary. In addition, in 2018 money, the awarded prices equate to £45.30/MWh in 2023/24 and £47.50/MWh in 2024/25, which is closer to today's baseload market prices.
"By 2023/24, this cannibalization effect will have grown and our analysis shows that regular levy payments may be still be needed for these wind projects during the life of their CfD contracts," Brabben said. "So, while it is right to say these contracts represent an outstanding deal for consumers, they are not necessarily guaranteed to be cost-free just yet."
The auction results still face a threat in the form of an ongoing judicial review, triggered by property and energy developer The Banks Group Ltd. on the grounds that the CfD scheme unfairly excludes onshore wind and other renewables.

Greater heights
If they go ahead as planned, some of the projects will lift the U.K.'s offshore wind sector — already the world's most advanced— to even greater heights. The three Dogger Bank projects would be the largest wind farm development in the world and are estimated to trigger investment of around £9 billion, according to Equinor.
The Crown Estate, which manages seabed rights in England, Wales and Northern Ireland, this month launched its latest auction for at least 7 GW of offshore wind development rights, ensuring there is ample supply to feed the pipeline necessary to reach the government's renewables targets.
Daniel Radov, director at NERA Economic Consulting, expects the result of the CfD auction to put significant pressure on wholesale power prices — which could affect appetite for future seabed leasing rounds.
"It could well make people just think again and consider carefully what is the value of those leases," he said.
Ultimately, it remains to be seen whether offshore wind projects are deliverable at prices that are — in the most stark example — more than 70% lower than comparable schemes from 2014. But many inside the camp are confident.
"The way the CfD auction is designed means that in order to be able to bid, a project needs to have come quite a long way," said Alon Carmel, senior director at FTI Consulting, who worked with one of the successful offshore wind developers on its bid. "They've done a lot of the work to know their project is deliverable."
