Phil de Villiers, Head of Offshore Wind at the Carbon Trust, looks at why the UK offshore wind industry must embrace cost reduction to reduce uncertainty.
It’s been a busy few weeks for the UK’s offshore wind industry. David Cameron provided a welcome boost by generating some long overdue positive headlines when he cut the ribbon on the first phase of the London Array offshore wind farm. The 175 turbine project, located in the Thames Estuary, owned by DONG Energy, Masdar and E.ON is now, at 630MW, officially the world’s largest offshore wind farm. “This is a great day for Britain and a big win for renewable energy," the Prime Minister said at the opening ceremony. "London Array shows you can build large scale renewable energy projects right here in Britain.”
Indeed the opening of the London Array took the UK’s installed offshore wind capacity to over 3GW, equating to 60% of Europe’s offshore wind capacity and confirming the UK’s hard earned position as world leader. The Prime Minister explaining why we are building large projects like the London Array explained that “this is because when it comes to clean energy, the UK has one of the clearest investment climates globally". So far so good.
But a recent study by VB/Research, while confirming the Prime Minister’s investment claim by highlighting the UK, alongside Germany, as the most attractive market for offshore wind investment, also found some real concerns around the current energy market reform in the UK. The research concluded that the positioning of the UK as an attractive market masks major concerns about the new contract-for-difference (CfD) regime, which will apply to all offshore wind farms that come online after March 2017.
While the research found that developers are accelerating projects that can come online before March 2017, the last date at which projects qualify for the existing ROC regime, they also found that developers are halting investment in projects that look likely to miss this deadline until further clarity is given on the new CfD mechanism. This is worrying.
But on cue the Government published some much needed clarity on the new mechanism by publishing the indicative ‘strike price’ for offshore wind for the five year period out to 2018/19. Interestingly the Government, like the bulk of developers, now appears less positive over the amount of capacity that can be built by 2020 and reduced its projection down from an upper level of 18GW to 16GW.
The strike price numbers indicate that the Government appears prepared to maintain the current relatively high levels of support for offshore wind out for the foreseeable future. The reductions in support proposed over the period are around 13% from £155/MWh down to £135/MWh. This seems reasonable given the quantity of new build that is expected over the time frame.
So what to make of all this? Well there’s no doubt that as the industry navigates between one support mechanism to another then there is bound to be uncertainty. Government must ensure that outstanding uncertainties over the new CfD regime are removed as quickly as possible. While they remain we will continue to see uncertain developers and uncertain financiers which results in project hiatus and also important supply chain investment decisions, with the associated industry ‘nirvana’ of new manufacturing and new jobs, being put on hold. However, the industry must also embrace their part of the bargain. If government is to provide greater long term stability over contracts, as the industry demand, then the industry must commit itself to long term price reduction. This seems fair.
The Carbon Trust through its work with nine developers as part of its Offshore Wind Accelerator has found five areas where major cost reductions can be delivered. Our analysis has found that learning by doing can reduce the costs of offshore wind by 7% and innovation around key areas, such a new foundation designs, can reduce costs by a further 25%. In short we believe that delivering offshore wind at levels near £100/MWh is possible by 2020.
This would put the technology on a par with onshore wind and nuclear. But this will not be easy. It will require continued government and corporate investment in innovation and a commitment from industry to demonstrate new technologies today that have the potential to save consumers billions tomorrow. Failure to fully embrace cost reduction and to put it centre stage of our offshore wind programme may cost the industry dear in the long run.