The government has defied gloomy price expectations for its latest auction for offshore wind capacity. The worry a few months ago was that bill payers would be forced to pay more than £100 a megawatt hour (MWh) via contracts that give developers guaranteed prices for their electricity output. In the event, winning projects landed at roughly £91/MWh.
Cue some forgivable crowing from Ed Miliband, the energy secretary. “A monumental step towards clean power by 2030,” he declared. Officials pointed to calculations by the energy consultants Aurora and Baringa that £94/MWh would have been a “cost-neutral” outcome for consumers even though today’s wholesale price, usually set by gas generation, is about £81/MWh (the analysts’ reasoning is that using less gas lowers the wholesale price, offsetting the cost of the subsidies for new windfarms).
But let’s not get carried away. Yes, this auction was Europe’s “biggest ever” in commissioning 8.4GW of capacity in one go – and it again proved the virtue of competitive tension in the bidding process. But it also demonstrated two hard truths about offshore wind and the wider push towards clean power.
First, the days when offshore wind got cheaper every year are over. The last auction at the end of 2024 bagged capacity at £82/MWh but those contracts were for 15 years. Miliband’s switch to 20-year contracts this time probably knocked £5/MWh off headline numbers, so a like-for-like comparison might score this year’s outcome at closer to £96/MWh. That equates to inflation of 17%. We are a very long way from the hopeful days of 2022 when offshore wind was still tumbling in price. Higher borrowing rates and tighter supply chains have changed the arithmetic.
The second point flows from the first: the rollout of offshore wind at these prices will not knock squillions off the price of electricity. Any downward pressure on bills cannot be enormous when we’re talking about the difference between £91 and a theoretically neutral price of £94. Yes, more renewables offer protection against spikes in the price of gas. But, remember, Wednesday’s inflation-linked prices are being locked in for 20 years in a system that already produces some of the highest electricity prices in the developed world.
Onshore wind and solar, where auction results are due in fortnight, should come in cheaper. But offshore, with its greater generating capacities, is the renewables workhorse. The consensus among energy analysts is that “whole system” savings from a renewables- and nuclear-heavy system will only start to appear sometime about 2040.
None of which should be read as an argument against offshore wind. Something has to be built because several nuclear power stations will soon close, and a third of the gas power plant fleet is nearing the end of its life. As Miliband pointed out, new gas plants aren’t cheap either, given bottlenecks in the supply of turbines – call it £147MW/h for building and operating one, says the energy department.
Instead, this auction has really demonstrated that we are deep in the world of trade-offs in energy transition. There are no more easy 2022-style pickings. Is it, for example, vital to hit Miliband’s target for clean power, defined as 95% generation from low-carbon sources, by 2030? Of course not. The deadline was always artificial.
As it is, the government is probably on course for 85%-90% after Wednesday’s auction. Why bother with the last bit if, as seems to be the case, the law of diminishing returns is setting in? Electricity also needs to be cheaper (or, at least, not even more expensive) to encourage the take-up of electric vehicles, heat pumps and so on.
Instead, the most pressing questions in energy-land are different. Is it possible to take a chunk out of the towering £80bn bill for rewiring the electricity grid? If 90% low-carbon is deemed enough, possibly, as retail energy suppliers have argued. Will new transmission cables arrive before the new windfarms are built? That is critical to keep a lid on “constraint” payments that run on to billions of pounds.
And what is the government’s plan for gas? It barely talks about the backup system for cold, windless winter days that will be retained. That is despite the scariest report out of the energy department in recent months being the one that warned of an “emerging risk” of running out of gas supplies by 2030 if an important piece of kit, such as a pipeline from Norway or an LNG terminal, were out of action.
Encouragingly, there are hints of greater pragmatism. Chris Stark, the head of “mission control” unit in the energy department, said the 2030 target for offshore wind is “on track” but it is “not essential” to hit it given the strong result in the latest auction; there is scope to be “choosy” on projects in future. Good.
For the next step, Miliband could say out loud what everybody already knows: the 2030 generation deadline can be ditched because 90% clean power is fine and bigger energy challenges lie elsewhere.