Offshore windfarms will be built for a record low price in the UK early next decade, after developers bid far more aggressively than expected for a multimillion-pound pot of government subsidies.
Industry watchers had expected the guaranteed price for power from windfarms around Britain’s coast to come in somewhere between £70 and £80 per megawatt hour, below the £92.50 for a new nuclear power station at Hinkley Point.
But the “exceptionally low” results of a government auction on Monday for subsidy contracts show two offshore windfarms will be built for £57.50 per MWh, way below even the most extreme predictions. The price is half of what new offshore windfarms were being awarded just two years ago.
Ministers said the subsidies, paid for by consumers on energy bills, would bring forward enough clean power for 3.6m homes and create thousands of jobs.
Richard Harrington, the energy minister, said: “The offshore wind sector alone will invest £17.5bn in the UK up to 2021 and thousands of new jobs in British businesses will be created by the projects announced today.”
As well as a major boost for renewables in the UK, which have suffered from government subsidy cuts in recent years, today’s auction has fuelled a debate over whether ministers should rethink their commitment to new nuclear power to meet the country’s carbon targets.
The Green party said the results should sound the death knell for Hinkley Point C, which is being built by EDF in Somerset.
Caroline Lucas, the party’s co-leader, said: “This massive price drop for offshore wind is a huge boost for the renewables industry and should be the nail in the coffin for new nuclear.
“While clean, green wind power has the potential to seriously cut people’s bills – the government’s undying commitment to new nuclear risks locking us into sky-high prices for years to come.”
Unlike Hinkley, where the price was agreed in negotations between EDF and government officials, the offshore windfarms’ backers had to compete in a reverse auction for the lowest guaranteed price, known as a contract for difference.
The lower the price, the more electricity generating capacity can be built. The government had allocated £240m-a-year for the subsidies but the competitive prices mean it now expects them to hit £176m-a-year at most.
The winning developers are Germany’s Innogy, which will receive £74.75 per MWh for Triton Knoll, off the coast of Lincolnshire, Denmark’s Dong Energy at £57.50 for its Hornsea Two project off the Yorkshire coast and Spain’s EDP with £57.50 for the Moray offshore windfarm in Scotland.
The higher price for Triton Knoll reflects the fact it will be delivered slightly earlier, in 2021-22, compared with 2022-23 for the other two.
In total, they will have a generating capacity of 3.2GW, the same as Hinkley Point C, though they should be operational at least two years before the pair of new reactors.
Matthew Wright, the managing director for Dong Energy UK, said: “This is a breakthrough moment for offshore wind in the UK and a massive step forward for the industry.” The industry body, RenewableUK, called the prices “astounding”.
The price of building offshore windfarms has fallen by nearly a third since 2012 as the technology matured, and developers believe that a new generation of even bigger turbines mean they can achieve further cost reductions in coming years.
“Offshore wind’s success was undoubtedly buoyed by the decreasing costs of capital in the sector and the wider downward trend of subsidy levels witnessed in other European tender processes,” said Robert Marsh of law firm Norton Rose Fulbright.
Lawrence Slade, the chief executive of Energy UK, which represents the UK’s big energy companies, said: “Today’s exceptionally low results are further evidence of how the cost of clean energy is continuing to fall, and the move to a low carbon future is delivered at the lowest cost to consumers.”
He called on the government to set out its long-term plan for cutting carbon emissions, and to provide certainty around the timing for future auctions. Ministers have allocated a further £440m-a-year for further auctions to be held before 2020, but have not confirmed when these might happen.