UK looks to revitalise its offshore wind sector

Last year, the UK’s offshore wind ambitions were setback when its renewable auction – Allocation Round 5 or AR5 – failed to attract any new projects, a first for what had been a successful Contracts for Difference scheme.

In response (and given the importance to offshore wind to meeting the UK’s net zero by 2050 target), this year the maximum strike price for successful projects under the Contract for Difference (CfD) auctions (AR6) was lifted 66 per cent to GBP73/MWh (around $141) while the strike price for floating offshore wind projects was increased by 52 per cent to GBP176/MWh (approximately $340)[i]. The AR5 strike price was set at GBP44/MWh ($85). The auction ran into trouble given the significant increase in project costs caused by inflationary pressures and supply chain issues.

The new UK Government, which committed itself to an ambitious offshore wind target of 55 GW by 2030, has also announced a significantly increased budget for the auctions. It set this year’s budget at GBP1.5 billion ($2.9 billion) for the latest renewable energy auction, more than 50 per cent up on the previous budget.  Of that, GBP1.1 billion ($2.1 billion) has been earmarked for offshore wind projects in the latest auction (Allocation Round 6, or AR6). The offshore wind budget available for AR6 is higher than all previous CfD rounds combined.

Floating offshore wind and other emerging technologies will receive £165 million additional support, increasing the budget for these technologies to £270 million ($524). This is a 61 per cent increase. 

The AR6 auctions opened in March and the successful contracts are expected to be announced next month. These projects are expected to be delivered by 2027/28 and 2028/29. The next two auctions, AR6 and AR7, are seen as critical to reaching the 2030 offshore wind target. The UK government has previously described offshore wind as “central” to meeting its electricity decarbonisation targets. But despite these new measures, it will not be easy to reach.

Considered a world leader in offshore wind, the UK has 15GW of operational capacity in 2023 from 45 wind farms, accounting for more than 20 per cent of global offshore wind capacity.  An important ingredient in its push for offshore is its lack of land mass and lower levels of alternative renewables such as solar in comparison to a country like Australia. Until it hit a wall in the last auction, offshore wind energy had grown steadily, while prices had continually fallen, supported by the UK Cfd auctions.

Figure 1: UK Offshore grid connected wind capacity by year (annual change)

Source: The Crown Estate Offshore Wind Report 2023

Good Results

Launched in 2014, the CfD scheme gives projects a guaranteed price for the electricity they generate and is intended to give companies investment certainty and confidence.

Until last year’s auction, the CfD mechanism had driven rapid cost reductions for offshore wind projects. In 2022 the price achieved was GBP37.35/MWh (2012 prices), 70 per cent lower than the first CfD auction held in 2015[ii]. This made offshore wind cheaper than onshore wind, solar and tidal energy, according to the UK Government. Until AR5, there had been strong competition for the contracts with investors seeing value in the revenue security they provided, which translated into easier access to low-cost project financing[iii] .

As a result of the success of the auctions, offshore wind now accounts for up to 17 per cent of total UK electricity generated, including 13GW of committed capacity. These are projects that are either under construction or that have government support on offer. The UK’s Crown Estate Report 2023 on offshore wind indicates there is a further potential pipeline of offshore projects with a capacity of 51GW categorised as under development or in pre-planning.

Figure 2:  UK Offshore wind project capacity

Note: 50 GW was the 2030 target set under the British Energy Security Strategy 2022. The Labour Government has since committed to a new target of 55 GW.

Source: The Crown Estate Offshore Wind report 2023.

In contrast to the success of earlier auctions, last year’s iteration, AR5, resulted in no bids for new projects, which was attributed to a failure to adjust the administrative strike price to reflect substantial increases in supply chain costs that had emerged and which the government had been warned about (see EnergyInsider Cost storm hits UK offshore wind.)

Setting Targets

In 2019 the UK targeted 30GW of offshore wind by 2030 – this was under the Offshore Wind Sector Deal signed by the UK Government and the Offshore Wind Industry Council.  The ambition was subsequently increased to 50GW by 2030 under the British Energy Security Strategy 2022 to help meet the net zero emissions by 2050 under the Climate Change Act 2008. To help achieve the bigger target, in 2022 the UK Government announced it would increase the frequency of the CfD auctions to every year rather than every two years.

The new Labour Government, which came into office in July, committed to increasing this to 55GW by 2030, with at least 5GW of floating offshore wind[iv]. According to the Committee on Climate Change[v], a statutory body established under the Climate Change Act, an estimated 75GW of offshore wind could be needed to meet the net zero target.  In its July 2024 report[vi] on progress, the Committee noted annual offshore wind installations will have to increase threefold compared to the average rate seen since the start of the decade to hit the original 50GW target. One of its recommendations was to ensure funding and auction design for the AR6 and AR7 auctions are appropriate to deliver the 5GW of offshore wind target. In terms of capacity, it will require more than 5GW to be added each year on average. As seen in Figure 2, the highest annual increase in capacity has been 2.4GW it is a rate not achieved to date in any year.

Real Risks

The Committee noted the low levels of offshore deployment in 2023, coupled with the failed AR5 auction for offshore wind, posed a real risk to the Government’s renewables targets.

It also noted the failure of last year’s auction (AR5) to procure any additional offshore wind capacity had “set back progress in an area that had previously been scaling up quickly. It is crucial that the next two allocation rounds get deployment rates back on track.”

There were some estimates that without increasing the budget for the auctions, they would only be able to support around 3.5GW.

What else can be done?

To support more offshore wind projects, in July the UK Government announced a partnership between Great British Energy and The Crown Estate. The Crown Estate is responsible for the seabed in England, Northern Ireland, and Wales, while the Crown Estate Scotland owns and manages the seabed in Scottish territorial waters and adjacent areas of the UK’s Exclusive Economic Zone[vii].

The Crown Estate has a £16 billion ($31 billion) portfolio of land and seabed and estimates the partnership will support up to 20-30GW of new offshore wind developments reaching seabed lease stage by 2030[viii].

The partnership means the public sector will undertake additional early development work for offshore wind projects.  In its statement, the UK Government said: “This will ensure that future offshore wind development has lower risk for developers, enabling projects to build out faster after leasing and crowding in private sector investment.”

It also means The Crown Estate can now borrow money, leveraging the seabed lease fees it charges developers to raise capital, according to industry group WindEurope. “This allows it to invest in the UK wind energy supply chain which will include much-needed port infrastructure and additional manufacturing capacity.”

We now await the success or otherwise of the new prices and other measures undertaken to achieve the UK’s ambitious offshore wind targets.

[i] Introduction to Allocation Round 6 Online event (cfdallocationround.uk)

[ii] Offshore wind - great.gov.uk international

[iii] Blown away, CfDRound 3 delivers record low price for offshore wind (kpmg.com)

[iv] Make-Britain-a-Clean-Energy-Superpower (labour.org.uk)

[v] About the Climate Change Committee - Climate Change Committee (theccc.org.uk)

[vi] Progress in reducing emissions 2024 Report to Parliament - Climate Change Committee (theccc.org.uk)

[vii] Offshore wind - great.gov.uk international

[viii] New Great British Energy partnership launched to turbocharge energy independence - GOV.UK (www.gov.uk)