16 March 2023

Britain’s booming offshore wind sector is in peril if the Government doesn’t change tack

By Sam Richards

On the banks of the River Tees, just north of Middlesbrough, sits 4,300 acres of brownfield land. This is industrial England; over 100 years ago the steel built here was sold around the world. Steel produced on Teesside still holds up the Sydney Harbour Bridge. The story since that point is all too familiar; in the face of rising costs and increasing competition from around the world, traditional industries like steel production on Teesside faded, until the lights were eventually turned off.

Yet this tired old story is being rewritten. 

Teesworks is now the UK’s biggest freeport, the country’s largest and most connected industrial zone. Lorries hurry back and forth across the vast site, and the next generation prepares old ground for new industries: hydrogen, carbon capture – and offshore wind.

At a prime spot right next to the docks, workers lay the foundations for a factory that will manufacture offshore wind monopiles – giant steel tubes that will be driven into the seabed and support turbines as tall as the Shard. The first contract for this factory is for a new windfarm, Hornsea 3. Standing nearly 100 miles off the Yorkshire coast, when it’s fully operational Hornsea 3 will be able to produce enough power for 3.2 million homes – cheap, clean electricity that reduces the UK’s reliance on imported fossil fuels.

Yet the work on Teesside could soon grind to a halt. Developers Orsted have said that Hornsea 3, along with many other projects secured in the latest Contracts for Difference allocation round (the means by which the Government procures low-carbon power), is at real risk of not going ahead.

Rising industrial costs due to global inflationary pressures (the cost of energy still impacts those who produce it), combined with windfall taxes, threaten to choke off this British success story.

Conscious of the challenges all firms are facing, and indeed their own increase in the headline rate of the corporation tax, the Government announced it would introduce full capital expensing at the Budget.

Full expensing allows businesses to deduct the cost of any investments they do straight away from their corporation tax bills, rather than over a number of years. It is effectively an investment tax cut, and it’s designed to make life easier for firms who invest in new plants and machinery.

Unfortunately, wind turbines will likely – unless there is a specific Government carve out – only qualify for 50% capital allowances because they are what’s known as ‘long-lived assets’. Now, this isn’t nothing, but it’s worth nothing that it’s much less generous than the capital allowances for oil and gas. Absurdly, wind turbines that connect to oil rigs rather than the grid benefit from an 80% upfront allowance.

This isn’t the only issue. The Government has introduced full expensing, for now, on a temporary basis. This means that firms who have long-term rolling programmes of investments, like a set of large offshore wind farms, miss out on the bulk of the benefit – and so may cancel the whole suite of investments. Orsted has set out that the ‘lion’s share of capital expenditure on Hornsea 3 and other forthcoming offshore wind projects will come outside the qualifying scope and timeframe’.

As a result, we risk losing not just 2,250 jobs on Teesside – and more in the wider supply chain – but crucial clean and cheap electricity at a time when we need every electron we can get our hands on.

Making full expensing permanent – as the Chancellor has said he would like to do – and allowing the green economy to make use of 100% capital allowances, not just 50%, would be a start in averting the nightmare scenario of the cancellation of Hornsea 3.

Alongside a tax system that isn’t providing clean industries with the support they need, we also have a planning system that makes it far too hard for them to build anything. The planning decision for Hornsea 3 was delayed four times and spent two years sitting on the Secretary of State’s desk. And the follow-up project Hornsea 4 was delayed a few weeks ago. Indeed, it takes up to 13 years to get an offshore wind farm up and running when constructing the thing only takes three at most. Meanwhile, onshore wind is effectively banned in England.

The amount of green paperwork clean energy businesses have to fill out to build environmentally friendly sources of energy grows year on year. The East Anglia Two windfarm took 10,961 pages of environmental impact assessment, Hinckley Point C 31,401 pages, Sizewell C 44,260. Each page is filled with reams of data collected and boxes ticked – and grounds for potential legal challenges that could stop the whole project.

It doesn’t have to be like this. Before the end of the month Britain Remade will be setting out 25 practical steps the Government could take to radically cut the red tape the holds up new offshore wind, solar and nuclear, and unlock new onshore wind. Clear policies that would provide certainty for investors desperate to build, create jobs and secure our energy supply.

There are reports that the Government is planning a ‘Green Day’ towards the end of the month when it will set out it’s update to the Net Zero Strategy and its response to Chris Skidmore’s Net Zero Review. They should use this moment to unleash the potential of our clean industries by stripping away the red tape – to make our country less reliant on imported gas, to cut our bills, and to secure the future of places like Teesside.

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Sam Richards is Chief Executive Officer of Britain Remade.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.