Developing offshore wind will boost regional growth and clean energy transmission, writes ICE Policy Fellow Kaloyana Kostova.
Offshore wind is essential for the UK's national energy security and journey to net zero.
Generating around 10GW of clean energy – enough to power around seven million homes – the UK has the world’s largest installed capacity of offshore wind.
But there’s a shortfall in offshore wind capacity after last year’s Contracts for Difference (CfD) auction failed to attract any bids for new projects.
The sixth CfD allocation round (AR6), which opens next week, is a chance to deliver the new clean energy projects the UK needs.
Why offshore wind?
The benefits of offshore wind are:
- Reduced impact and noise pollution due to distance from local populations
- Available space for more wind farms
- Reduced electricity bills due to cost efficiency
- Efficiency: wind turbine rotors work more effectively at sea level due to the dense air
The UK’s aim is to deliver up to 50GW of offshore wind capacity by 2030.
What are Contracts for Difference?
CfDs are the government’s main mechanism for supporting low-carbon electricity generation.
A CfD is a contract between a low-carbon electricity generator and a government-owned company, the Low-Carbon Contracts Company (LCCC). The LCCC awards contracts through annual auctions.
The auction determines a flat cost (the ‘strike price’) for the electricity the generator produces over a 15-year period. During this period:
- If the average market price for electricity (the ‘reference price’) is higher than the strike price, the generator pays the LCCC the difference.
- If it’s lower, the LCCC pays the generator the difference.
This guaranteed revenue encourages investment in new power projects.
Attracting new bids for offshore wind
With the opening of the next allocation round, there’s the question of what ‘good’ should look like.
The government has already raised the maximum strike price (the ‘reserve price’) for the next CfD auction. But will that be enough to attract new bids?
On 6 March, the chancellor announced over £1 billion for the upcoming allocation round, £800 million of which is set aside for offshore wind.
This is the “largest ever budget for a single round” – but due to the higher reserve price, the money is unlikely to go as far as the government hopes.
So, what does the future hold?
‘A British success story’
The CfD scheme has boosted renewable energy investment in the UK, with offshore wind described as a “British success story” in the recent past.
There have been five CfD auctions since it was established in 2014.
In 2021–22, AR4 leveraged over 7GW of offshore wind generation at consumer prices four times lower than the cost of gas.
From 2025 onwards, the government will also offer Sustainable Industry Rewards – additional payments to developers who reduce carbon emissions in their supply chains or offer social benefits.
Implementing this, however, may be challenging. The government will need to ensure these rewards deliver commitments and add real value.
How big is the challenge?
Scaling up technology to meet future demand presents a significant challenge to the industry.
Is the drive to build bigger turbines necessarily a good thing? Or are we developing technologies the UK can’t manufacture?
There’s a clear need for standardisation and understanding the risk associated with new products, processes, systems, and infrastructure.
Manufacturers of multi-component systems must also avoid pushing this risk down the supply chain, which can cause a complex chain of ‘domino’ liabilities.
Local capacity, including port infrastructure and logistics, as well as grid and supply chain capacity, may become bottlenecks.
Digital twins and models can predict and assess local impacts and mitigate risks.
The amount of steel and concrete needed is its own challenge.
In the Celtic Sea, meeting floating offshore wind targets could require nine times the volume of concrete poured at Hinkley Point.
Minimising CO2 emissions is yet another reason to explore the benefits of sustainable regional industries, which make proactive use of local products and services.
The future of clean energy: what does ‘good’ look like?
CfD has worked well in the past and has helped make the economic case for wind vs. fossil fuels by reducing the cost through scale and efficiency.
The government and industry now have an opportunity to find a model that delivers a fair return for investors and value for consumers.
Increasing the maximum strike price may be a necessary short-term action. But the UK needs a long-term vision and focus on social benefits to meet its targets sustainably and securely.
To this end, two areas still need addressing:
- Domestic infrastructure and supply
- Social benefits and regional development
The domestic supply challenge
As well as the Sustainable Industry Reward, the government has also consulted on the potential for UK manufacturing to play a greater role in the supply chain.
Historical evidence suggests that the British convention of developing ‘supply chain readiness’ through support for small and medium enterprises hasn’t worked. This is partly due to gaps between national and regional policy.
The EU and US have introduced policies to ensure the transition to renewable energy delivers domestic economic benefits.
There’s a risk the UK may deviate from this new international policy playbook.
The UK-EU Trade and Cooperation Agreement prohibits the UK from favouring ‘local content’ – meaning domestic components and services – over imported content for public grants.
In fact, despite the Offshore Wind Sector Deal’s local content target of 60%, British companies have managed to capture only 42% of the works on British wind farms.
A pathway to successful regional development
A lot has already happened since September 2023.
A good example is the Crown Estate opening Offshore Wind Leasing Round 5 to create up to 4.5GW of new renewable energy capacity in the Celtic Sea.
Cornwall and Isles of Scilly Local Enterprise Partnership (COIS LEP) has also proposed policy interventions to maximise local content in Celtic Sea projects.
Developing offshore industrial capacity across Cornwall and many other regions can play a key role in unlocking domestic energy and transmission projects.
It also creates jobs and maximises regional economic development.
A strategy and upfront investment are necessary to strengthen regional industries to meet the ambitious deployment targets the government has set.
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