Offshore wind farms are under threat because a government subsidy is not catching up with rising costs, according to a report.
It comes as an industry leader said there’s a possibility that the funding scheme will for the first time end up excluding offshore wind, a flagship net-zero project in the UK.
According to the National Grid, in 2022, 38.2 percent of the UK’s electricity was generated by “low-carbon” means, with 26.8 of the power coming from wind.
Over the years, the growth of low-carbon energy benefited from the government’s “Contracts for Difference (CfD)” scheme, which helps guarantee a stable price for the energy that generators would produce.
In each funding round, the government sets a budget and a maximum amount for a given project, the National Grid then uses the money to run an auction, and state-owned Low Carbon Contracts Company (LCCC) would sign contracts with the lowest bidders.
A contract, typically 15 years long, would include an agreed “strike price” that only changes with inflation.
When a successful bidder generates energy and sells it on the market if the price is cheap than the “strike price,” the LCCC would top up the difference, using money raised through a green levy on energy bills, but if the company sells energy at a higher wholesale price, it would have to pay the difference back to the LCCC.
However, the bidding process has encouraged companies to drive down the “strike price” to win contracts.
Wholesale energy prices are decided by oil and gas prices. According to ECIU’s estimate last year, wind farms were expected to pay back £660 million between October 2021 to April 2023.
However, supply chain costs have also risen amid high inflation. While the government added an additional £22 million earlier this month, bringing the CfD budget to £190 million, according to the ECIU, “industry say this eleventh-hour move will make only a very limited impact on any new wind farm capacity secured.”
“If the government wanted to maximise bids at auction, the budget could even be upped, or the constraint removed entirely,” the report said.
The cap on the budget is designed to limit the amount of green levy taxpayers have to pay when wholesale energy prices are low, but ECIU argues that the protection is now unnecessary because wholesale energy prices are expected to remain high, rendering the risk “an almost outright impossibility.”
The authors also argued that high energy prices mean customers can get money back from generators even if strike prices go up by 20 percent.
Otherwise, “the risk is that wind farms, despite them generating electricity cheaper than the predicted wholesale price and so saving bill payers money, will not get built if strike prices have been set too low by the government not taking account of the new cost pressures,” the report said. “This would be a huge setback when Britain aims to generate 50 [Gigawatt] from wind by 2030.”
Ana Musat, head of policy at the trade association RenewableUK, told Bloomberg she believes “it could happen that there’s no offshore wind in this auction.”
New winners of CfD contracts are expected to be announced on Sept. 8, the Department for Energy Security and Net Zero said it can’t comment on the outcome.
In an email to The Epoch Times, a spokesperson for the department said, “last year’s Contracts for Difference scheme auction was the largest ever, issuing contracts to nearly 100 clean tech projects, and we increased this year’s budget to reflect the large volume of eligible applications received.
“The UK is a world leader in renewable technologies, with the four largest operational offshore wind farms in the world providing enough capacity to power the equivalent of at least 10 million homes per year.
“Contracts for Difference is designed to protect generators against price fluctuations, and compares favourably to other international schemes. We understand there are supply chain pressures for the sector globally, and we are listening to their concerns.”
