Only 2GW offshore wind will come through the AR5 Contracts for Difference (CfD) auction, according to analysis by Energy and Climate Intelligence Unit (ECIU).
In its report, Offshore wind: All at sea? How old Treasury rules threaten the UK’s booming offshore wind industry, ECIU found the latest government auction for new offshore wind farms, due to complete in September, could see fewer projects making it through Treasury rules leaving UK bill payers around £1.5bn worse off per year.
As well as causing the pausing of one AR4 project, inflation is also posing a risk to the prospects of potential AR5 projects if the government fails to take account of it.
ECIU has calculated that the administrative strike price for AR5 is 17.8% above the clearing strike price for AR4, or 7.2% above CPI.
This would secure around 2GW of capacity compared to the 7GW in AR4.
The analysis also shows that price inflation of 20% would preclude developers from bidding into AR5.
In spite of inflation pushing up the costs of offshore wind, new farms are set to produce electricity much cheaper than the regular wholesale electricity price, which is largely set by gas power stations.
Even in a scenario where offshore wind costs increase to £60 per megawatt hour (MWh) this will still be much less than the wholesale cost of electricity which is set to stay around £90-100/MWh, says ECIU.
With the Government’s CfDs scheme, these wind farms would be contracted at a lower price than the wholesale price creating a saving for bill payers.
Treasury rules that don’t take account of predictions that the gas price will stay high and that put an arbitrary limit on the number of farms that can be contracted, are set to constrain the number of wind farms getting through the auction and so keep bills higher.
The Government recently increased the budget for the auction from £170m to £190m, but ECIU’s analysis finds that this is likely to make little difference to the outcome of the auction and ignores the fact that renewables are predicted to save money, not add cost to bills.
Energy Analyst at ECIU Jess Ralston said: “Government seems to be focussed on North Sea gas licences and tax breaks for oil companies that won’t bring down bills while tying up offshore wind farms that generate electricity cheaper than gas in red tape. What is going on?
“Even with inflation pushing costs up for offshore wind, it will still generate electricity much cheaper than gas power stations.
“Stifling wind farms pushes up bills. Treasury’s rules seem to be actively working against bringing them down.”