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October 25, 2023

Another Energy Price Rise? UK's Offshore Wind Auction Failure

The failure of the UK's latest offshore wind auction serves as a wake-up call for policymakers and stakeholders alike.

The UK's most recent offshore wind auction has sent shockwaves through the energy sector, raising serious questions about the country's ability to meet its ambitious climate targets. A new analysis by academics from Imperial College London, in collaboration with Drax Electric Insights, sheds light on the potential repercussions of this failure, including a surge in wholesale energy prices and increased carbon dioxide emissions. Let's dive into the details.

What are Offshore Wind auctions?

An offshore wind auction is a competitive bidding process where companies or developers bid for the rights to build and operate offshore wind farms. These auctions are typically organised by a government or a regulatory body with the aim of increasing the country's renewable energy capacity. The process usually involves several steps:

  1. Announcement: The government or regulatory body announces the auction, specifying the areas where offshore wind farms can be developed, the total capacity to be awarded, and other terms and conditions.
  2. Pre-Qualification: Interested companies submit applications and are vetted for their technical and financial capabilities.
  3. Bidding: Qualified companies submit their bids, which often include the price at which they are willing to sell the electricity generated by the offshore wind farm.
  4. Award: The bids are evaluated, and contracts are awarded to the companies that offer the most competitive terms, usually those willing to produce electricity at the lowest cost.
  5. Contract Signing: The winning bidders sign contracts, often called Contracts for Difference (CfD) in the UK, which guarantee a certain price for the electricity generated for a set period.
  6. Development and Operation: Once the contract is awarded, the company can proceed with the development, construction, and eventual operation of the offshore wind farm.

Offshore wind auctions are a key mechanism for countries to achieve their renewable energy and climate goals, as they help to allocate resources efficiently and drive down the costs of offshore wind energy.

The Failed Auction: What Went Wrong?

The UK Government had high hopes for this auction, aiming to procure up to 5GW of power to contribute to its lofty goal of installing 50GW of offshore wind capacity by 2030. However, the auction failed to secure any new offshore wind projects. Why? Inflationary pressures played a significant role, making the upper price limit set by the Contracts for Difference (CfD) scheme unattractive to bidders.

The Domino Effect: Consequences of the Failure

According to a special report by Drax Electric Insights, the effects of this setback could have long-lasting implications. Analysts predict that the UK could face an annual electricity generation shortfall of 26 terawatt-hours (TWh) later this decade. This gap would likely be filled by increased reliance on gas and electricity imports, leading to an estimated additional six million tonnes of carbon dioxide emissions. To make matters worse, this could result in a more than 20% surge in wholesale electricity prices.

A One-Trick Pony? The UK's Overreliance on Wind Energy

The report's authors argue that the UK's current framework is too dependent on wind energy for decarbonising the country's electricity system. This overreliance puts the UK in a precarious position, making it "heavily dependent on a single technology" for achieving its decarbonisation goals. Dr Iain Staffell of Imperial College London, the lead author of the Drax Electric Insights report series, stated, "The UK has to triple its offshore wind capacity in just seven years to meet the government’s target. With the auction delivering no new capacity, there’s now a huge shortfall, and the goal is looking increasingly unattainable."

A Balanced Approach: The Way Forward

The authors propose a more balanced approach to decarbonisation, advocating for a diversified portfolio of low-carbon technologies. By not putting all our eggs in one basket, the UK can build a more resilient and sustainable energy infrastructure that is better equipped to meet future challenges.

The failure of the UK's latest offshore wind auction serves as a wake-up call for policymakers and stakeholders alike. It highlights the urgent need for a more balanced and diversified approach to achieving the country's climate and energy goals. As we move forward, it's crucial to learn from this setback and make informed decisions that will shape the UK's energy landscape for years to come.

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