Eamonn Ives is a Researcher at Bright Blue.
The clean energy sector has the wind well and truly in its sails at the moment. This week’s news abounds with stories of how the costs of offshore wind farms have plummeted to a record low – and at a much faster rate than even the most optimistic energy forecasters were predicting. What was just a few years ago one of the most expensive clean energy technologies is now within striking distance of becoming free of subsidy.
Following auction results at the start of the week, the cheapest offshore projects will be paid a guaranteed price of £57.50 per megawatt hour of electricity they generate for a total of 15 years. Altogether, this will generate over 2.3 gigawatt hours of capacity, enough to power nearly 2.5 million homes.
To contextualise this extraordinary feat, only two years ago average subsidies awarded for offshore wind farms hovered around £117 per megawatt hour – double the figure for the latest projects. Even more remarkable is how it compares against Hinkley Point C nuclear plant in Somerset. This project will receive a guaranteed price of £92.50 per megawatt hour over 35 years – increasing annually by inflation – when it starts generating after 2025.
The advent of cheap offshore wind thus calls into question the Government’s strategy to offer generous subsidies to new large-scale nuclear. It also further undermines the economic case for new tidal lagoon power, which developers estimate could cost over £70 per megawatt hour, but only provided projects are awarded a much longer contract over 90 years. Solar and wind have respectively outshone and breezed past their competitors to become the best-value clean energy technologies for bill payers.
Bigger, more efficient turbines and economies of scale for maintenance and supporting infrastructure explain much of the globally falling price of electricity generated by offshore wind farms – and indeed other renewables like solar photovoltaics. The UK’s auctions were just the latest triumph for offshore wind, after earlier this year a German project successfully bid to construct and operate an offshore wind farm, commissioning in 2025, free of subsidy.
The Government deserves credit for backing offshore wind with regular capacity auctions, for making power contracts contingent on sharp cost reductions, and for harnessing competition to drive down costs. By allocating subsidies through competitive, market-based auctions, the department estimates that the capacity secured in this round of auctions will be up to £528 million less per year than would have been the case in the absence of competition.
Indeed, auctions like this for government-backed fixed-price contracts, which ensure investor confidence by guaranteeing a certain level of return on investment and so reduce financing costs, ought to be held for other renewable technologies like onshore wind and solar. The most recent government study predicted that onshore wind and large-scale solar would be the cheapest sources of electricity – with a lower price even than new gas. Yet there hasn’t been an auction since the days of the Coalition Government.
But how can the Government push energy prices even lower? First, it should consult on and publish pathways for how quickly individual technologies reduce their costs and get off subsidies altogether. Subsidies should stimulate the early market, not constitute a permanent business model. Ministers should resist supporting new energy technologies without a clear, independently-reviewed plan to become cost-competitive. All new energy projects in the UK require some form of government-backed contract in order to attract the capital necessary to get built. The key is awarding contracts only to the technologies with low prices.
Second, the Government should give access to concessional financing for clean energy projects, for instance using the recently renewed UK Guarantees scheme for infrastructure. As members of the EU, we are constrained by rules on State Aid. But, after Brexit, the Government will be able to utilise its low borrowing costs to help get this infrastructure built more cheaply by issuing government loan guarantees to private developers.
Recent Bright Blue polling also confirms renewables are popular with the public, including Conservative voters. Specifically, it found that the top five most favoured energy sources for generating electricity amongst Conservative voters were all renewable. Of all environmental issues, more than half of Conservative voters rank renewable energy generation amongst their top three concerns.
The Government has been vindicated for its backing of offshore wind. The most recent figures show the technology can make a significant, cost-effective contribution to meeting the UK’s energy needs. As the Government prepares to release its Clean Growth Plan on meeting its future climate change obligations, it should capitalise on these cost reductions and push for even cheaper clean energy for consumers and businesses.