The zero-subsidy offshore wind bids seen in other European markets in recent years appear unlikely to be replicated in a contracts for difference (CfD) allocation round kicking off in the U.K. next week.
Andrei Utkin, IHS Markit senior analyst for global power and renewables, said plants built under the U.K.’s third CfD allocation round (AR3) would need support to compete in day-ahead wholesale markets because of the prevalence of other clean energy sources.
Renewable energy capacity additions due between now and 2023, when AR3 projects are expected to start going live, will lead to “substantial cannibalization effects,” Utkin told GTM. This could put the day-ahead wholesale price for electricity below the long-term levelized cost of energy (LCOE) for offshore wind in 2023.
“This is not only in the U.K.,” said Utkin. “This is the European trend. Therefore, we cannot expect zero-subsidy bids as in Germany or Netherlands.”
Nevertheless, considerable uncertainty remains over the exact level of support that developers will look to secure in AR3, which opens for applications on May 29.
The U.K. government has established caps on the amount of capacity and money being offered in AR3, which covers offshore wind along with seven other “less established” renewable energy generation technologies, such as tidal stream and anaerobic digestion.
The total capacity amounts to 6 gigawatts while the budget for the round is £65 million at 2012 prices (equivalent to around $82 million at today’s exchange rates).
This money is what is available to top up payments to project owners that cannot achieve an agreed ‘strike price’ for energy sold on electricity markets. Any amounts above the strike price go back into the CfD pot.
In addition, offshore wind faces a price cap of £56 ($71) per megawatt-hour for projects coming online in the financial year running up to April 2024, and £53 ($67) per megawatt-hour for those entering operation in the following 12 months.
If the industry opts to aim for the highest possible strike price then AR3 could see at most around a gigawatt of offshore wind awarded, assuming almost nothing goes to other technologies.
However, Utkin said strike prices were already at £57.50 ($72.77) per megawatt-hour in the last allocation round, in 2017, and AR3 was expected to be “quite competitive” in comparison.
“Taking into consideration that overall budget will also be partly spent on other niche technologies, we assume that the awarded total offshore wind capacity will be between 2 gigawatts and 3.2 gigawatts,” Utkin said.
Robert Norris, head of communications at the wind industry body RenewableUK, said there were “no particular worries” about the capacity likely to be installed in AR3. “We’re hoping to see record capacity procured at record low prices in this round,” he said.
A key factor in upcoming strike prices will be how well the offshore wind industry can harness cost reductions to reduce its levelised cost of energy. One of the main contributors to this trend is turbine size, since larger turbines require fewer foundations and less fabrication and installation effort per unit of installed capacity.
Currently leading the charge for larger turbines is GE Renewable Energy, whose 12-megawatt Haliade-X machine this month won the backing of European power Vattenfall for European projects. It is unclear if the Haliade-X will be deployed in U.K. waters, though.
For now, the likely frontrunner for most AR3 projects will be a 10-megawatt machine being readied by market-leading offshore wind turbine maker Siemens Gamesa.
The product will feature a 193-meter (633-foot) diameter rotor and will be market ready in 2022, according to Clark MacFarlane, managing director of Siemens Gamesa in the U.K.
Siemens Gamesa expects the machine to produce up to 30 percent more energy a year than the company’s current offshore workhorse, the 8-megawatt SG 8.0-167 DD, which had been selected for 6.4 gigawatts of capacity as of January this year.
MacFarlane said Siemens Gamesa would be watching closely when the auction results are announced later this year. “Experience to date suggests the U.K. auction process always throws up surprises,” he said.
However, the U.K.’s departure from the European Union, which is still under negotiation, was not seen as a major threat. “We don’t see anything which will fundamentally change the future direction for wind energy,” MacFarlane said.
Source: Greentech Media
