Raised expectations among East Anglian project developers and the supporting supply chain provided misplaced late last month in the announcement of the results of the third allocation round of contracts for differences (CfDs). Despite the excellent results secured back in 2017 at the last auction, East Anglian developers did not pick up any of the winning contracts this time round.
That said, it was a phenomenal outcome for the offshore wind sector announced on 19 September. In all some 5.8GW of capacity cleared in the third auction, which was restricted to less established (or “pot 2”) technologies, with offshore wind securing 5.5GW of this. But these were all connected with either the Dogger Bank or Scottish schemes. Additionally, remote island onshore wind eligible secured contracts for the first time, for 275MW at four sites, while 34MW of biomass also won contracts at two sites.
The capacity cap at 6GW (and not the £65mn budget) was the constraint, which means a project at least in excess of 300MW didn’t make it.
Regionally the biggest single winner is the North East, with four major Dogger Bank schemes summing to 5GW winning through. But Scotland also fared well, with both offshore and remote island wind securing contracts.
In terms of the winning players, SSE came out well on top with 2.2 5GW, Innogy with 1.4GW and Equinor with 1.8GW. But Cornwall Insight on social media said that it believes over 3GW of applicants were unsuccessful. It is likely that they included Iberdrola, EDPR and Engie.
A further, rather big surprise was the clearing price. At £39.65/MWh (in 2012 money, so £49/MWh nominal in 2023) for project commissioning in the first delivery year 2023-24, this shocked many. The corresponding figures for the second delivery year (2024-25) were £41.61/MWh (so £52.8/MWh nominal). Assuming government projections are realised, this would make offshore wind cheaper than existing gas, as has been illustrated by Simon Evans of Carbon Brief.
These prices were nearly 30% lower than the previous auction in 2017 and over 60% lower than the first auction round over 2014. The prices also compare very well with the government‘s reference price of £60-£65/MWh (adjusted for inflation) and are in line with the current GB forward power price around £50/MWh and the current trading range of £45-£55/MWh.
The city consensus was that a clearing price of around £50/MWh was likely, so the results were significantly below expectations here as well. Given the timing of the projects, it is likely these projects will use larger 12MW turbines, which is the key driver of the lower costs.
The media reaction to this outcome was to proclaim that new offshore wind is now subsidy-free. But this might be premature given the effect that increased deployment will have, as it is likely that these reference prices will turn out to be high and prices will unquestionably be lower at times of weak demand. So, levy payments will still flow, and the net impact of the CfDs is hard to predict. But some degree of price stabilisation is inevitable.
Despite the disappointing outcome from AR3 for local projects, the prospects for the regional energy sector continue to look excellent. This is because:
- we would expect some sites off East Anglia, including some that are likely to have been unsuccessful in AR3 to come forward in the next scheduled CfD allocation round in 2021
- there has been the recent approved extensions to five existing regional sites (Sheringham Shoal, Dudgeon, Greater Gabbard, Galloper and Rampion), and
- of the launch late last month of Round 4, the Crown Estate first leasing opportunity of this scale in a decade, which creates the opportunity for at least 7GW of new projects in the waters around England and Wales, but including the Eastern bidding region comprising the eastern Wash, Southern North Sea and East Anglia areas.