Q3 2019: Zero-subsidy offshore wind?

by Dr Iain Staffell – Imperial College London 

The third round of offshore wind auctions were announced in September, bringing forward 5.4 GW of new capacity for a record low of £44/MWh.¹ 

This price has fallen 30% since the last auction in 2017, and could possibly mark these as the world’s first negative-subsidy wind farms, which pay money back to UK consumers over their lifetime.²

Six new wind farms were awarded contracts and will come online from 2024 onwards. These will be built by SSE, Innogy and Equinor (formerly Statoil, the Norwegian state oil company). Two farms (0.45 GW) will be built off the east coast of Scotland, and four (totalling 5 GW) will be built on Dogger Bank: an area of shallow water in the middle of the North Sea. These new wind farms will be twice the size of today’s largest wind farm, Walney Extension. In total, this newly-auctioned capacity is expected to create 8,000 jobs in the UK.

Europe’s offshore wind farms, highlighting the area of Dogger Bank where the sea is less than 30 metres deep (dark blue). Wind farms that have been auctioned and are due to be built in the UK are shown as red circles, existing and neighbouring countries’ wind farms are shown as grey circles. Circle size is proportional to installed capacity.

Offshore wind is supported by Contracts for Differences (CfDs). These contracts between the government and wind farm guarantee a reference price for each MWh generated. If the wholesale power price is below the agreed ‘strike price’, the wind farm receives a top-up from government – hence CfDs are synonymous with subsidising renewables. However, this crucially provides revenue stability over the coming decades. By shielding wind farms from fluctuations in power prices (partly driven by international fossil fuel prices), the government can reduce the risk to developers. This allows them to reduce their cost of financing, making wind farms cheaper to build.

Over the last two years, wholesale electricity has averaged £50/MWh, so the CfDs for this latest round of wind farms would have been working in reverse: paying money back to the government if they were already built. Electricity prices have risen faster than inflation over the last decade; if they continue rising through the 2020s these wind farms will be the first to have a negative subsidy, meaning they actively reduce consumer bills.

Since the UK’s first auction in 2015, the price of offshore wind has fallen by over 15% per year, from £134 down to just £44 per MWh.³ The pace of reduction has surprised many in the energy industry: as recently as 2016 experts predicted these prices wouldn’t be seen until 2050. Offshore wind has quickly become one of the cheapest ways to produce electricity, and these cost reductions are not unique to the UK. Auctions from neighbouring countries are rapidly falling, and reached parity with power prices in Germany back in 2017.

The difference between bids into European offshore wind auctions and average wholesale power prices (£/MWh)⁴

Many things have helped to bring down the cost of offshore wind. Bigger turbines are more cost effective, and Dogger Bank will be among the first to use the world’s largest turbine, the GE Haliade-X. It stands 260 metres tall (twice the height of the London Eye) and each machine produces 12 MW – five times more than the average turbine built just five years ago.

At the same time, wind farms are getting bigger. Three of the Dogger Bank farms are being built as if they were one, streamlining construction and grid connection. These farms are also moving to better areas, further from shore where wind speeds are higher, and in relatively shallow water meaning the foundations are easier to lay. The UK’s expertise in North Sea oil & gas has helped build up the skilled workforce for offshore wind.

Looking further to the future, more radical plans are being developed. TenneT, who operate the Dutch and part of the German power system, plan to develop the ‘Power Hub’: an artificial island in the North Sea to connect a staggering 12 GW of wind farms (almost four Hinkley Point nuclear plants in terms of capacity). To avoid the cost of ever-longer transmission links, some are planning to build offshore wind farms with no grid connection at all. Instead, they would generate hydrogen directly from the wind, and tap into existing gas pipelines and storage facilities to provide “green gas” for heating homes and industry.

The International Energy Agency reports that offshore wind could provide the entire world’s future electricity needs. The UK government aims for 30 GW of offshore wind by 2030, helping to meet net-zero by 2050. The UK’s most recent auction suggests this is not just a technical possibility, but now an economically viable way to power much of the world’s growing electricity needs.

1: £44/MWh in today’s money. The actual lowest bid was £39.65/MWh, but is reported in money of 2012.

2: The level of support that wind farms receive depends on several factors, including the level of wholesale electricity prices over the coming decades and how significantly prices are depressed during times of high wind output.

3: In 2019 currency – the original bids were £119.89 and £39.65 in the money of 2012.

4: Based on 10-year average power prices.

Lead author: Dr Malte Jansen