The energy transition relies on ensuring certainty of revenue

All-Energy 2022 was an opportunity to build on the progress made at COP26 and to set out a route map for the UK achieving net zero targets. A key focus I noted at this year’s conference was offshore wind, and this has prompted me to reflect on the sector’s achievements to date in the UK and its future ambitions.

A core thought has been that the UK, specifically Scotland, is clearly the world leader in generating electricity from offshore wind, but why is the UK ahead of countries with similar conditions for offshore wind i.e. New Zealand?

The UK is the world leader in generating electricity from offshore wind, boasting seven of the world’s 10 largest offshore wind sites. In 2020, around 13% of the UK’s electricity generation was from offshore wind. In December 2020, the UK Government announced its ambition for the UK to deploy 40 gigawatts (GW) of offshore wind by 2030, an increase of 30GW. Last month it raised its ambition to 50GW by 2030. That goal is expected to deliver £60 billion of investment and 40,000 jobs by 2026.

The offshore wind sector in Scotland has continued to deliver large developments such as Moray East, which completed this year, and the Kincardine Offshore development, which has been important in demonstrating the future economic viability of floating offshore wind. Earlier this year, Crown Estate Scotland awarded just under 25GW of projects under its ScotWind leasing allocation, approximately 15GW of which will be floating. This is welcome news as the allocation of floating wind represents a huge uplift of Scotland’s ambition to be a global leader in this technology. Until now, the offshore wind industry has focused on projects with fixed seabed foundations, restricting the viability of most offshore projects in the shallower waters off our coasts.

The ScotWind offshore wind leasing round in 2021 was the first in Scottish waters for a decade, after the rights were devolved to Scotland in 2017. It had been hoped that the 2021 ScotWind leasing round may result in projects for 10GW, but after evaluating 74 bids, a massive 25GW of offshore wind project development rights were awarded. To put this in context, in 2020, 6GW of offshore wind generation was commissioned worldwide.

Reflecting on why the UK is ahead of countries with similar conditions for offshore wind, it is clear it is because the UK Government has ensured certainty of revenue for developers.

The UK implemented a Contracts for Difference (CfD) scheme that has succeeded in creating a competitive platform attracting investment and driving down costs. The scheme subsidises the first 15 years of a development project (most have an estimated 25-year life cycle).

CfDs are contracts between the Low Carbon Contract Company (LCCC) and renewable power project developers which provide a contract providing for the developer to receive a payment equal to the amount by which the energy price falls below a “strike price” (a figure bid by a developer in the CfD auction process) and make a payment, if the energy price is above the strike price.

The CfD scheme is the government’s primary mechanism for supporting low-carbon electricity generation. It incentivises investment in renewable energy by providing developers with greater certainty of revenue and reduced exposure to wholesale price fluctuations through 15-year contracts. So far, CfDs have supported around 16 GW of new low-carbon electricity capacity, and have proved successful in driving down the per unit price of offshore wind by approximately 65% since the first auctions were held.

The recent offshore wind auctions in Holland and Germany have been ‘subsidy-free’. The fact that only two bidders competed in the Dutch leasing round may be an indication of investor sentiment to that model.

Ensuring certainty of revenue for developers has been key to the success of offshore wind in the UK, and it provides a lesson on how we can encourage the energy transition we all desire.

As the deployment of offshore wind projects ramps up as a result, the question of how future UK offshore wind sites are connected to the grid is now becoming increasingly important. A complete overhaul of our grid has been established through the UK Government’s Energy White Paper, and the Offshore Transmission Network Review has an ongoing remit to find solutions to decarbonise more quickly while meeting and maintaining a stable and efficient grid. As a consequence, we are likely to see the largest change to our grid since the privatisation in the early 1990s. It is likely that considerable pressure will be placed on authorities responsible for the grid to speed up the opportunities for further offshore wind deployment.

Tom's Hot Take: The energy transition relies on governments ensuring certainty of revenue

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