Analysis: Record-low price for UK offshore wind cheaper than existing gas plants by 2023

§ Cheaper than gas

Today’s auction is the third to award contracts for difference (CfDs) to support low-carbon electricity supplies. Winning bidders are paid a fixed “strike price” for the electricity they generate over the course of 15 years and can then continue to operate on the open market.

During the contract period, projects are paid the difference between a reference wholesale price of electricity and their strike price. If this strike price is higher than the reference price, projects receive a subsidy to make up the difference, with the cost added to consumer bills. If it is lower, the developer pays back the difference, reducing bills.

In the first auction, in 2014, strike prices for offshore wind, onshore wind and solar surpassed expectations, coming in well below what had been expected. The second auction, in 2017, saw offshore wind strike prices effectively halve, making the technology cheaper than newbuild gas-fired power stations.

In today’s third auction, expectations have been confounded again. The 12 projects won support at prices of around £40/MWh, whereas a Twitter poll of energy analysts had expected £47/MWh.

The new record-low prices mean these new offshore windfarms will also generate electricity more cheaply than existing gas-fired power stations, Carbon Brief analysis suggests. The only costs these gas plants face are for fuel, operations and maintenance, network access and CO2 emissions, since the costs of construction have already been sunk.

This is shown in the chart below, with strike prices awarded to offshore wind (red) seen to have declined dramatically over time, undercutting the estimated price of electricity from existing gas plants (dark blue), which has remained steady and is expected to rise slowly in the future.

(The future price of electricity from gas is uncertain as it depends on wholesale gas prices and market carbon prices. The chart uses central estimates from the Department for Business, Energy and Industrial Strategy, BEIS, and assumes a modern, highly efficient gas plant. Older equipment and higher – or lower – gas and carbon prices could strongly affect the true outcome.)

BEIS has not published its own estimates of the costs of different electricity generating technologies since 2016. It has already completed an update, but has yet to publish the findings.

Nevertheless, today’s results show that UK renewables will soon pass the second of two “tipping points” predicted in 2017 by Michael Liebreich, founder of Bloomberg New Energy Finance.

The first of these tipping points is when electricity from newly constructed renewables becomes cheaper than from new fossil-fired generation. The second is when it becomes cheaper to build new renewables than to keep running existing fossil-fueled power stations.

These tipping points have huge symbolic significance, contributing to a changing conversation in public, political and media spheres.

For example, the then-secretary of state for business, energy and industrial strategy Greg Clark gave a speech in 2018 proclaiming the imminent “end of the trilemma”. The trilemma was the idea that electricity supplies can meet only two out three competing priorities: cheap, secure or low-carbon. This trade-off will be “well and truly over” by the mid-2020s, Clark said, as “green power will be the cheapest”. Today’s results prove him right even earlier than he expected.

The results also settle recent debate over what would count as truly “subsidy-free” renewables. They have long been expected to be cheaper than building new gas-fired power stations facing a CO2 price that reflects the true costs of those emissions.

Now renewables in the UK are also cheaper than building gas-fired capacity facing market carbon prices and they will soon be cheaper than the costs of running existing gas plants, coming in below even the expected price of electricity on the open market.

(There is some debate as to whether the government’s projections of the market price are accurate, or, as some analysts suspect, too high. If these analysts are right, then today’s new renewable schemes might receive what amounts to a “price stabilisation” subsidy, yet they would still be the cheapest option for consumers, explains Tom Edwards, consultant at Cornwall Energy. Large quantities of renewable generation will suppress the market price, meaning if prices are low and today’s CfDs do include a subsidy, it will partly be because renewables suppressed prices in the first place. Edwards tells Carbon Brief: “From a consumer point of view, this is a good deal.”)

§ Cutting carbon

Today’s results are important not only for political reasons, but also because offshore wind is being expected to form the backbone of a massively expanded and zero-carbon electricity supply for the UK, as it heads towards its target of cutting emissions to net-zero by 2050.

The government has signed an offshore “sector deal” under which the industry is expected to increase offshore wind capacity to 30GW by 2030, up from closer to 9GW today.

This capacity would supply a third of the UK’s rising electricity needs – as heat and transport are increasingly electrified – with this share reached today only in combination with other renewables. 

In the longer term, the Committee on Climate Change (CCC) has suggested that up to 75GW of offshore wind might be needed by 2050 as part of reaching net-zero. Even this might turn out to be too low, as it was based on an expected cost for offshore wind of £51/MWh in 2050 – a level already beaten in the results of today’s auction for capacity in the early 2020s.

If renewable electricity is even cheaper than the CCC expected, as today’s results suggest, then it might make sense to push further and faster in terms of electrifying other parts of the economy, such as heat and transport.

In this light, it is worth noting that the Crown Estate this week began a leasing round for the rights to build another 7GW of offshore wind capacity around the coasts of England and Wales, beyond the projects that are already in the pipeline.

§ Falling costs

The first offshore wind projects to be awarded CfDs received strike prices of £150/MWh, shown in the chart above adjusted for inflation, at £167/MWh in current money. Today’s auction round saw prices nearly four times lower, as low as £44/MWh in current money.

Onshore wind (light blue in the chart above) and solar (yellow) have also seen rapid cost declines in successive auction rounds, though not so dramatic as those for offshore wind.

One reason is that these technologies were only able to compete in the first CfD auction, with the second and third rounds being reserved for technologies categorised as “less established”. (Today’s auction included onshore windfarms on remote Scottish islands within this category.)

Banks Renewables, an onshore wind developer, launched a legal challenge over the third auction round, arguing it is unfairly discriminatory. The case is ongoing and it remains unclear how the outcome could affect today’s results, should Banks’ challenge prove successful.

The falling costs of UK renewables are remarkably low, but not exceptional. The international experience has been similar, with contracted project costs falling around the world, as the chart below shows. Much of the range in costs for projects due to start operating in the 2020s relates to when their contracts were agreed, with more recent deals such as today’s coming in cheaper.

UK schemes (green circles) include the cost of connecting to the grid, as do those coloured red, whereas grid costs are socialised to a greater or lesser extent for projects coloured orange.

As well as differently timed awarding of contracts, developers face a range of other cost factors when it comes to building an offshore windfarm. These include the allocation of costs for connecting to the grid, mentioned above. Currency fluctuations are also important, with sterling having fallen sharply against the dollar and euro over the past year, raising costs for UK schemes.

Other factors include the depth of water where the project is sited and the distance from the shore, which determines the size of foundations, journey times for maintenance trips and length of cables needed to connect to the mainland.

The point of connection to the national grid is also important, as the cost of using the electricity network varies depending on location. Scottish projects were less successful in today’s auction, with analysts BVG Associates attributing this to their deeper water and higher grid charges.

The overriding factor in cost reductions, however, has been the increase in turbine size, combined with a host of other smaller technical developments in turbine design, manufacture, installation and maintenance protocols, according to recent research published by BEIS.

Larger turbines sweep a larger area and have access to higher, more consistent winds at higher altitude, increasing the amount of time when they can generate electricity.

Larger turbines further out to sea also have much higher “capacity factors”, meaning they generate a higher proportion of their maximum potential output across each year. Existing offshore windfarms around the UK reach capacity factors of around 47%, whereas the next generation are expected to rise towards as high as 60%, according to BEIS estimates.