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The UK's ambitious offshore wind target promises to reshape its
energy landscape long-term, according to an executive panel at the
Global Offshore Wind conference in London on 29 September.
In 2020, the UK upped its offshore wind target to 40 GW in the
next decade, building on its 2019 strategy for the sector, in a
bid to reach net-zero emissions by 2050.
The Dutch and German governments have recently held auctions for
offshore wind that is now set to be built subsidy-free, exposing
developers with winning bids to more price volatility and potential
price cannibalization.
Speakers suggested that taking a Europe-style "zero-subsidy
route" in the UK would threaten the viability of its 40 GW offshore
wind target.
Jim Smith is managing director of the renewables arm of Scottish
utility SSE, which has 17 offshore wind assets in operation and
another three under construction, and this week announced it would
invest £100 million with Japanese major Marubeni into the Scottish
offshore wind supply chain
"We need to start thinking now about how the electricity market
will work post-2050 with renewable penetration, because not only is
it about attracting newbuild with whatever the price signals are,
but it's also about all of these existing assets," said Smith.
Currently, the UK's Contracts for Difference (CfD) subsidy pays
developers for 15 years, but not an offshore wind project's entire
25-year lifespan, leading to lower margins in the long run. "The
[offshore wind farms'] short-run marginal costs may be zero, but
they still have operating costs, they still need to continue to
make money, or they pause, and we actually go backward rather than
forwards," Smith added.
But the problem can be solved, he said, pointing to the
industry's recent successes. Many questioned the high cost of
offshore wind power, however, the sector had "smashed" price
reduction goals, manufacturers improved technology, and supply
chains arose to reduce costs and energy prices, said Smith.
While in 2017, the price for offshore wind per megawatt-hour was
£167, the price in 2021 is £83 and will to decline to £46 by 2025,
according to UK-based renewable
planning consultancy Pager Power.
The UK had over 10 GW of operational offshore wind capacity at
the end of 2020, the largest figure for any country.
Central planning, for example, to allocate zones for different
maritime industries, for wind farms, and their networks could help
developers overcome technical challenges and help the UK to reach
net zero, according to Duncan Clark, head of UK operations for
Danish wind developer Ørsted, who spoke on the panel.
However, Smith said that reducing costs for floating wind
remains a hurdle. "We need to deliver the same cost-reduction
trajectories that we saw for bottom-fixed platform designs over the
last 10 years and if we do that we can open up a huge market
worldwide," he explained. He added that the trend toward requiring
that a proportion of the wind farm equipment is manufactured in the
UK may not be very economic.
Not only do larger floating wind farms need to be developed to
reduce their overall cost, but the UK must develop ports that don't
currently exist, said Ralph Ibendahl, head of EMEA energy
transition at RBC Capital Markets, which advised TotalEnergies on
the purchase of a controlling stake in the 1-GW Seagreen offshore
wind farm off Scotland's east coast.
But the cost of all this development should not fall heavily on
the consumer. "I think the final challenge is that it would be good
to be seen to be delivering a just transition, because we're really
doing something and something that should really take 30 years,
we're trying to do 10 years. They are the big challenges for this
industry," said Smith.
Grid challenges
One of the UK's tasks before it can reach the heady heights of
40 GW is the introduction of HVDC transmission for offshore wind.
HVDC systems are able to transfer power over long distances more
efficiently and with superior stability.
"It's been done elsewhere, but it's the first time in the UK and
that won't be without some challenges. We have to move to a world
where that's just routine off the shelf, and all of our
stakeholders are very, very comfortable with it, whether that be
insurers, funders, consenting authorities, or whoever," said
Clark.
Constraints on landside power networks, such as local planning
consents that must be gained a piecemeal manner, pose another
barrier, according to Clark. "Of course, today our trajectory is
limited by the pace at which we can get access to the grid, and so
we have some real challenges there. Not only with the technology
but with planning … And I think we'll be trying to draw
[regulators] into the issues that are quite technical. We've been
talking about a coordinated transmission grid for as long as I can
remember, at least 15 years," he said.
Sven Utermöhlen, chief operating officer of RWE Renewables'
offshore wind unit, chimed in on the need for coordinated planning.
"So, we have seen that in Germany and that is still an issue that
is not yet fully resolved. And I think it is a topic in many
markets that has now caught up with the UK. I absolutely agree the
UK needs to invest the money, and it needs to invest it ASAP," he
said.
"However, it needs to be coordinated with a really stringent
planning and consulting approach because what we see in Germany is
the fact that we needed to build out high voltage transmission
lines from the North to the South, and Germany has known for 10
years the problem is some of the lines have still not been
consented," he added.
The RWE executive warned that transmission policy changes could
mean delays. "We've seen some markets changing their system
rapidly, and that usually has led to a hiatus, a two-year sort of
pause. And that's the last thing that we need in the UK," he
said.
Smith argued for an integrated grid in the regions where
networks will be needed by wind farms. This would allow building to
take place at a faster pace than if it remained a piecemeal process
where developers apply for each connection, he said.
Morten Buchgreitz, global senior vice president at Danish wind
turbine manufacturer Vestas, noted it was a global problem and that
the power networks needed to be developed to transport supplies to
homes to enable electric vehicle charging.
Investment cliff ahead
Attractive terms for power purchase agreements won't be as
readily available in five years, posing new risks and disincentives
for investors in post-subsidy markets. "And I guess the final
option is that, you know, you live with the risk on a merchant
basis, but I think that is probably the least-preferred route for
equity or developers or funders or lenders," said Ibendahl.
Currently, oil and natural gas majors have some appetite for
risk when it comes to investing in the sector, he said. "When we
think about further out, given the scale of ambition in offshore
wind, and God forbid something goes wrong on a merchant deal, the
interest and the appetite that has been built up in the equity and
debt market so far could evaporate quite quickly," he added.
"I think that is something for regulators to really think about.
Squeezing the last bit of margin out of a deal, is that the right
thing?" he asked.
That only two bidders competed in a recent Dutch offshore wind
auction was a consequence of the zero-subsidy market, creating the
need for "a regulatory solution," he warned.
Posted 30 September 2021 by Cristina Brooks, Senior Journalist, Climate and Sustainability