A few weeks ago, it was claimed on multiple news outlets that the cost of producing offshore wind power has plummeted over the past couple of years. The BBC claimed that “offshore wind power [is] now cheaper than new nuclear”, while other news outlets even made the claim that offshore wind is now cheaper than new gas.
Why? The Contracts for Difference (Cfd) Second Allocation Round Results, which took place earlier this month, show that two new offshore wind schemes won CfD contracts at £57.50 per MWh. This represents the guaranteed price that producers are offered to supply electricity. The figure is in 2012 prices, but represents an astonishing fall from some of the offshore wind contracts that were awarded at up to £150/MWh in 2014.
However, as outlined in detail by Professor Hughes in a report published yesterday, this does not necessarily mean there has been a collapse in costs associated with offshore wind production. The study examined the capital costs of 86 offshore wind farms and concluded that there has been no material fall in cost over the past few years. The paper argues that the extra costs of moving offshore wind into deeper waters have offset gains arising from improvements in technology.
Why then have these low CfD prices been accepted? Rather than representing collapsing costs, it could simply be commercial speculation. Professor Hughes argues the most likely explanation is that companies are bidding low and uneconomic prices in order to make sure of obtaining the CfDs. Companies may view these contracts as low-cost, no penalty options, gambling on future market circumstances and government policies that may generate income above the CfD.
Jonathan Ford of the Financial Times has also sounded the alarm in relation to the low strike prices. He points out that the contracts do not represent an absolute commitment, with developers permitted to withdraw if they are unable to obtain financing.
It is more than likely that the hype around cheap offshore wind has been completely misplaced. Policymakers must be aware that, in all likelihood, offshore wind will remain a very expensive industry to subsidise for many years to come. And, of course, it will be energy consumers that will pay the price.
But let’s see how keen investors are to take these projects up.