What trilemma? Offshore auction answers UK energy questions

The UK government has published the results of the second Contracts for Difference auction.

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A Word About Wind
September 18, 2017
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What trilemma? Offshore auction answers UK energy questions

The UK government has published the results of the second Contracts for Difference auction, for which only offshore wind, dedicated biomass and advanced conversion technologies were eligible to enter, and the results for offshore wind are astonishing, with 3 gigawatts - enough to power over 3million homes - securing contracts.

Two of the winning projects, Hornsea 2 and Moray Firth, will be delivered at a price of £57.50/MWh, which is far below even the most bullish of industry predictions. A project where the first phase completes earlier, Triton Knoll, will cost £74.75/ MWh. Most industry observers had been expecting pricing in the range £65-£70/MWh, a price that would only recently have been considered impossible to achieve.

Indeed, these prices are half of those in the previous CfD auction in 2015 and far below the ‘FID [financial investment decision] enabling' CfDs negotiated bilaterally with a number of offshore wind projects.

For many years, the energy market has wrestled with the ‘trilemma’: security of supply, decarbonisation, and affordability. Offshore wind is currently delivering all three.
We have the following observations about these results:

Correctly-focused government policy works
The UK can be rightly proud of its track record in offshore wind, having delivered over 5GW of operational capacity, and is a world leader. The industry has secured millions in investment into ports and operational facilities, usually in places much in need of regeneration. Whilst Brexit will create many challenges for all industries, offshore wind is likely to be considered a ‘flagship’ activity for the country.

The Government, as well as key stakeholders such as The Crown Estate, has nurtured the industry well: providing sufficient subsidy to allow its development and given it a clear challenge to reduce costs with the promise of further support as those costs reduce. It is clear that this strategy has worked.

Financing will get ever more challenging
Offshore wind has become one of the most financeable infrastructure classes in the world. Recent project financings in the UK, such as Beatrice, Galloper and Race Bank, have all been highly-subscribed at low interest rates.

Equity returns have also been driven well into single figures, driven by the attractive ticket sizes, volume and visibility of deal flow, investment grade counterparties constructing and operating the assets, revenue stabilisation through the CfD mechanism and the emergence of direct investment from institutional investors

However, these projects all had much higher revenues from their support mechanisms. Reduced CfD strike prices mean lower cash to service debt and a greater impact of cost overruns. Many of the projects will have assumed the availability of larger, cheaper turbines, lower operations and maintenance costs and greater levels of generation. This may mean that banks looks to increase margins if they perceive these as over-optimistic cost reductions.

Onshore wind could deliver even cheaper prices
The strike prices of Moray Firth and Hornsea 2 reflect a number of factors: lower financing costs, greater scale, more mature supply chain and a strategic desire from the developers. Offshore wind is cheaper than any other form of energy available now, even accounting for additional reserve power or energy storage for when the wind is low.

Since 2015 when the UK Government announced its plan to change planning policy to deter development of onshore wind in England and remove all subsidy via the closure of the Renewables Obligation, we have seen nearly 4GW of projects enter into planning in either Scotland, Wales or Northern Ireland. At present the build out of these projects is being hampered by the organic and unstructured development of corporate power purchase agreements (PPAs) and lack of policy support from government.

The onshore wind industry provides the UK government with a unique opportunity, unlike conventional technologies or nuclear to also deliver significant generation capacity, quickly on to the grid whilst also meeting the three principles of the energy trilemma set out above; decarbonisation, security of supply and low cost power.

To exploit this opportunity and encourage the onshore wind industry alongside its offshore sibling to help address the increasing concerns around UK generation capacity the UK government should also provide a CfD to onshore.

As my colleague Dane Wilkins, head of energy and infrastructure at JLL, put it: “Onshore wind at a strike price of £50/MWh or potentially even lower could be the silver bullet government is desperately seeking as UK capacity margins fall further, policy makers should seriously consider this alongside the attraction of lower prices for consumer and UK industry rather than protecting Nimbyism.”

We will keep a close eye on the Conservative Party conference next month (1-4 October) for any indication that it is changing policy.

The UK government has published the results of the second Contracts for Difference auction, for which only offshore wind, dedicated biomass and advanced conversion technologies were eligible to enter, and the results for offshore wind are astonishing, with 3 gigawatts - enough to power over 3million homes - securing contracts.

Two of the winning projects, Hornsea 2 and Moray Firth, will be delivered at a price of £57.50/MWh, which is far below even the most bullish of industry predictions. A project where the first phase completes earlier, Triton Knoll, will cost £74.75/ MWh. Most industry observers had been expecting pricing in the range £65-£70/MWh, a price that would only recently have been considered impossible to achieve.

Indeed, these prices are half of those in the previous CfD auction in 2015 and far below the ‘FID [financial investment decision] enabling' CfDs negotiated bilaterally with a number of offshore wind projects.

For many years, the energy market has wrestled with the ‘trilemma’: security of supply, decarbonisation, and affordability. Offshore wind is currently delivering all three.
We have the following observations about these results:

Correctly-focused government policy works
The UK can be rightly proud of its track record in offshore wind, having delivered over 5GW of operational capacity, and is a world leader. The industry has secured millions in investment into ports and operational facilities, usually in places much in need of regeneration. Whilst Brexit will create many challenges for all industries, offshore wind is likely to be considered a ‘flagship’ activity for the country.

The Government, as well as key stakeholders such as The Crown Estate, has nurtured the industry well: providing sufficient subsidy to allow its development and given it a clear challenge to reduce costs with the promise of further support as those costs reduce. It is clear that this strategy has worked.

Financing will get ever more challenging
Offshore wind has become one of the most financeable infrastructure classes in the world. Recent project financings in the UK, such as Beatrice, Galloper and Race Bank, have all been highly-subscribed at low interest rates.

Equity returns have also been driven well into single figures, driven by the attractive ticket sizes, volume and visibility of deal flow, investment grade counterparties constructing and operating the assets, revenue stabilisation through the CfD mechanism and the emergence of direct investment from institutional investors

However, these projects all had much higher revenues from their support mechanisms. Reduced CfD strike prices mean lower cash to service debt and a greater impact of cost overruns. Many of the projects will have assumed the availability of larger, cheaper turbines, lower operations and maintenance costs and greater levels of generation. This may mean that banks looks to increase margins if they perceive these as over-optimistic cost reductions.

Onshore wind could deliver even cheaper prices
The strike prices of Moray Firth and Hornsea 2 reflect a number of factors: lower financing costs, greater scale, more mature supply chain and a strategic desire from the developers. Offshore wind is cheaper than any other form of energy available now, even accounting for additional reserve power or energy storage for when the wind is low.

Since 2015 when the UK Government announced its plan to change planning policy to deter development of onshore wind in England and remove all subsidy via the closure of the Renewables Obligation, we have seen nearly 4GW of projects enter into planning in either Scotland, Wales or Northern Ireland. At present the build out of these projects is being hampered by the organic and unstructured development of corporate power purchase agreements (PPAs) and lack of policy support from government.

The onshore wind industry provides the UK government with a unique opportunity, unlike conventional technologies or nuclear to also deliver significant generation capacity, quickly on to the grid whilst also meeting the three principles of the energy trilemma set out above; decarbonisation, security of supply and low cost power.

To exploit this opportunity and encourage the onshore wind industry alongside its offshore sibling to help address the increasing concerns around UK generation capacity the UK government should also provide a CfD to onshore.

As my colleague Dane Wilkins, head of energy and infrastructure at JLL, put it: “Onshore wind at a strike price of £50/MWh or potentially even lower could be the silver bullet government is desperately seeking as UK capacity margins fall further, policy makers should seriously consider this alongside the attraction of lower prices for consumer and UK industry rather than protecting Nimbyism.”

We will keep a close eye on the Conservative Party conference next month (1-4 October) for any indication that it is changing policy.

The UK government has published the results of the second Contracts for Difference auction, for which only offshore wind, dedicated biomass and advanced conversion technologies were eligible to enter, and the results for offshore wind are astonishing, with 3 gigawatts - enough to power over 3million homes - securing contracts.

Two of the winning projects, Hornsea 2 and Moray Firth, will be delivered at a price of £57.50/MWh, which is far below even the most bullish of industry predictions. A project where the first phase completes earlier, Triton Knoll, will cost £74.75/ MWh. Most industry observers had been expecting pricing in the range £65-£70/MWh, a price that would only recently have been considered impossible to achieve.

Indeed, these prices are half of those in the previous CfD auction in 2015 and far below the ‘FID [financial investment decision] enabling' CfDs negotiated bilaterally with a number of offshore wind projects.

For many years, the energy market has wrestled with the ‘trilemma’: security of supply, decarbonisation, and affordability. Offshore wind is currently delivering all three.
We have the following observations about these results:

Correctly-focused government policy works
The UK can be rightly proud of its track record in offshore wind, having delivered over 5GW of operational capacity, and is a world leader. The industry has secured millions in investment into ports and operational facilities, usually in places much in need of regeneration. Whilst Brexit will create many challenges for all industries, offshore wind is likely to be considered a ‘flagship’ activity for the country.

The Government, as well as key stakeholders such as The Crown Estate, has nurtured the industry well: providing sufficient subsidy to allow its development and given it a clear challenge to reduce costs with the promise of further support as those costs reduce. It is clear that this strategy has worked.

Financing will get ever more challenging
Offshore wind has become one of the most financeable infrastructure classes in the world. Recent project financings in the UK, such as Beatrice, Galloper and Race Bank, have all been highly-subscribed at low interest rates.

Equity returns have also been driven well into single figures, driven by the attractive ticket sizes, volume and visibility of deal flow, investment grade counterparties constructing and operating the assets, revenue stabilisation through the CfD mechanism and the emergence of direct investment from institutional investors

However, these projects all had much higher revenues from their support mechanisms. Reduced CfD strike prices mean lower cash to service debt and a greater impact of cost overruns. Many of the projects will have assumed the availability of larger, cheaper turbines, lower operations and maintenance costs and greater levels of generation. This may mean that banks looks to increase margins if they perceive these as over-optimistic cost reductions.

Onshore wind could deliver even cheaper prices
The strike prices of Moray Firth and Hornsea 2 reflect a number of factors: lower financing costs, greater scale, more mature supply chain and a strategic desire from the developers. Offshore wind is cheaper than any other form of energy available now, even accounting for additional reserve power or energy storage for when the wind is low.

Since 2015 when the UK Government announced its plan to change planning policy to deter development of onshore wind in England and remove all subsidy via the closure of the Renewables Obligation, we have seen nearly 4GW of projects enter into planning in either Scotland, Wales or Northern Ireland. At present the build out of these projects is being hampered by the organic and unstructured development of corporate power purchase agreements (PPAs) and lack of policy support from government.

The onshore wind industry provides the UK government with a unique opportunity, unlike conventional technologies or nuclear to also deliver significant generation capacity, quickly on to the grid whilst also meeting the three principles of the energy trilemma set out above; decarbonisation, security of supply and low cost power.

To exploit this opportunity and encourage the onshore wind industry alongside its offshore sibling to help address the increasing concerns around UK generation capacity the UK government should also provide a CfD to onshore.

As my colleague Dane Wilkins, head of energy and infrastructure at JLL, put it: “Onshore wind at a strike price of £50/MWh or potentially even lower could be the silver bullet government is desperately seeking as UK capacity margins fall further, policy makers should seriously consider this alongside the attraction of lower prices for consumer and UK industry rather than protecting Nimbyism.”

We will keep a close eye on the Conservative Party conference next month (1-4 October) for any indication that it is changing policy.

The UK government has published the results of the second Contracts for Difference auction, for which only offshore wind, dedicated biomass and advanced conversion technologies were eligible to enter, and the results for offshore wind are astonishing, with 3 gigawatts - enough to power over 3million homes - securing contracts.

Two of the winning projects, Hornsea 2 and Moray Firth, will be delivered at a price of £57.50/MWh, which is far below even the most bullish of industry predictions. A project where the first phase completes earlier, Triton Knoll, will cost £74.75/ MWh. Most industry observers had been expecting pricing in the range £65-£70/MWh, a price that would only recently have been considered impossible to achieve.

Indeed, these prices are half of those in the previous CfD auction in 2015 and far below the ‘FID [financial investment decision] enabling' CfDs negotiated bilaterally with a number of offshore wind projects.

For many years, the energy market has wrestled with the ‘trilemma’: security of supply, decarbonisation, and affordability. Offshore wind is currently delivering all three.
We have the following observations about these results:

Correctly-focused government policy works
The UK can be rightly proud of its track record in offshore wind, having delivered over 5GW of operational capacity, and is a world leader. The industry has secured millions in investment into ports and operational facilities, usually in places much in need of regeneration. Whilst Brexit will create many challenges for all industries, offshore wind is likely to be considered a ‘flagship’ activity for the country.

The Government, as well as key stakeholders such as The Crown Estate, has nurtured the industry well: providing sufficient subsidy to allow its development and given it a clear challenge to reduce costs with the promise of further support as those costs reduce. It is clear that this strategy has worked.

Financing will get ever more challenging
Offshore wind has become one of the most financeable infrastructure classes in the world. Recent project financings in the UK, such as Beatrice, Galloper and Race Bank, have all been highly-subscribed at low interest rates.

Equity returns have also been driven well into single figures, driven by the attractive ticket sizes, volume and visibility of deal flow, investment grade counterparties constructing and operating the assets, revenue stabilisation through the CfD mechanism and the emergence of direct investment from institutional investors

However, these projects all had much higher revenues from their support mechanisms. Reduced CfD strike prices mean lower cash to service debt and a greater impact of cost overruns. Many of the projects will have assumed the availability of larger, cheaper turbines, lower operations and maintenance costs and greater levels of generation. This may mean that banks looks to increase margins if they perceive these as over-optimistic cost reductions.

Onshore wind could deliver even cheaper prices
The strike prices of Moray Firth and Hornsea 2 reflect a number of factors: lower financing costs, greater scale, more mature supply chain and a strategic desire from the developers. Offshore wind is cheaper than any other form of energy available now, even accounting for additional reserve power or energy storage for when the wind is low.

Since 2015 when the UK Government announced its plan to change planning policy to deter development of onshore wind in England and remove all subsidy via the closure of the Renewables Obligation, we have seen nearly 4GW of projects enter into planning in either Scotland, Wales or Northern Ireland. At present the build out of these projects is being hampered by the organic and unstructured development of corporate power purchase agreements (PPAs) and lack of policy support from government.

The onshore wind industry provides the UK government with a unique opportunity, unlike conventional technologies or nuclear to also deliver significant generation capacity, quickly on to the grid whilst also meeting the three principles of the energy trilemma set out above; decarbonisation, security of supply and low cost power.

To exploit this opportunity and encourage the onshore wind industry alongside its offshore sibling to help address the increasing concerns around UK generation capacity the UK government should also provide a CfD to onshore.

As my colleague Dane Wilkins, head of energy and infrastructure at JLL, put it: “Onshore wind at a strike price of £50/MWh or potentially even lower could be the silver bullet government is desperately seeking as UK capacity margins fall further, policy makers should seriously consider this alongside the attraction of lower prices for consumer and UK industry rather than protecting Nimbyism.”

We will keep a close eye on the Conservative Party conference next month (1-4 October) for any indication that it is changing policy.

The UK government has published the results of the second Contracts for Difference auction, for which only offshore wind, dedicated biomass and advanced conversion technologies were eligible to enter, and the results for offshore wind are astonishing, with 3 gigawatts - enough to power over 3million homes - securing contracts.

Two of the winning projects, Hornsea 2 and Moray Firth, will be delivered at a price of £57.50/MWh, which is far below even the most bullish of industry predictions. A project where the first phase completes earlier, Triton Knoll, will cost £74.75/ MWh. Most industry observers had been expecting pricing in the range £65-£70/MWh, a price that would only recently have been considered impossible to achieve.

Indeed, these prices are half of those in the previous CfD auction in 2015 and far below the ‘FID [financial investment decision] enabling' CfDs negotiated bilaterally with a number of offshore wind projects.

For many years, the energy market has wrestled with the ‘trilemma’: security of supply, decarbonisation, and affordability. Offshore wind is currently delivering all three.
We have the following observations about these results:

Correctly-focused government policy works
The UK can be rightly proud of its track record in offshore wind, having delivered over 5GW of operational capacity, and is a world leader. The industry has secured millions in investment into ports and operational facilities, usually in places much in need of regeneration. Whilst Brexit will create many challenges for all industries, offshore wind is likely to be considered a ‘flagship’ activity for the country.

The Government, as well as key stakeholders such as The Crown Estate, has nurtured the industry well: providing sufficient subsidy to allow its development and given it a clear challenge to reduce costs with the promise of further support as those costs reduce. It is clear that this strategy has worked.

Financing will get ever more challenging
Offshore wind has become one of the most financeable infrastructure classes in the world. Recent project financings in the UK, such as Beatrice, Galloper and Race Bank, have all been highly-subscribed at low interest rates.

Equity returns have also been driven well into single figures, driven by the attractive ticket sizes, volume and visibility of deal flow, investment grade counterparties constructing and operating the assets, revenue stabilisation through the CfD mechanism and the emergence of direct investment from institutional investors

However, these projects all had much higher revenues from their support mechanisms. Reduced CfD strike prices mean lower cash to service debt and a greater impact of cost overruns. Many of the projects will have assumed the availability of larger, cheaper turbines, lower operations and maintenance costs and greater levels of generation. This may mean that banks looks to increase margins if they perceive these as over-optimistic cost reductions.

Onshore wind could deliver even cheaper prices
The strike prices of Moray Firth and Hornsea 2 reflect a number of factors: lower financing costs, greater scale, more mature supply chain and a strategic desire from the developers. Offshore wind is cheaper than any other form of energy available now, even accounting for additional reserve power or energy storage for when the wind is low.

Since 2015 when the UK Government announced its plan to change planning policy to deter development of onshore wind in England and remove all subsidy via the closure of the Renewables Obligation, we have seen nearly 4GW of projects enter into planning in either Scotland, Wales or Northern Ireland. At present the build out of these projects is being hampered by the organic and unstructured development of corporate power purchase agreements (PPAs) and lack of policy support from government.

The onshore wind industry provides the UK government with a unique opportunity, unlike conventional technologies or nuclear to also deliver significant generation capacity, quickly on to the grid whilst also meeting the three principles of the energy trilemma set out above; decarbonisation, security of supply and low cost power.

To exploit this opportunity and encourage the onshore wind industry alongside its offshore sibling to help address the increasing concerns around UK generation capacity the UK government should also provide a CfD to onshore.

As my colleague Dane Wilkins, head of energy and infrastructure at JLL, put it: “Onshore wind at a strike price of £50/MWh or potentially even lower could be the silver bullet government is desperately seeking as UK capacity margins fall further, policy makers should seriously consider this alongside the attraction of lower prices for consumer and UK industry rather than protecting Nimbyism.”

We will keep a close eye on the Conservative Party conference next month (1-4 October) for any indication that it is changing policy.

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Full archive access is available to members only

Not a member yet?

Become a member of the 6,500-strong A Word About Wind community today, and gain access to our premium content, exclusive lead generation and investment opportunities.