Earlier this week, the Government released the results of its latest renewable power auction – that rare bit of good news that both Ed Miliband and Claire Coutinho can get behind. After last year’s annus horribilis for offshore wind, it’s a welcome boost for the sector, alongside onshore wind, solar, and more – 131 projects all told. Yet for the sceptics, these results were further evidence that renewables are an expensive boondoggle. What should we make of all this, and what do these results mean for the future of our energy system?
To understand this, first we need a bit of background. Contracts for difference (CfDs) provide a wind farm (for example) a guaranteed price for 15 years, and this price is determined by an auction. If the price of power is below this guaranteed price, that wind farm receives a top-up subsidy (the ‘difference’), funded via consumer energy bills. However if the market price of power is higher, the wind farm pays this difference back to consumers (which happened during the energy crisis when power prices were through the roof).
This programme has been running for almost a decade, and it’s mostly been a big success at bringing down the costs of building renewables. From the first round in 2015 to the fourth round in 2022, prices for offshore wind dropped by nearly 70%, a great outcome for the sector and consumers.
But beyond the dry economics, these results also had political significance for the green movement – not only are renewables good for the planet, they’re also good for your wallet, as the cheapest source of new generation. Critics countered that other costs were excluded from these headline numbers (such as backing up renewables when the weather doesn’t cooperate, or building all the additional pylons they’ll require). This argument simmered on in the background as the green tide rolled forward.
Recently, however, things started to go a bit pear-shaped. Supply chain pressures and cost inflation hit the wind sector particularly hard, alongside increased financing costs driven by higher interest rates. This was not just a UK issue – around the world, projects were put on hold or delayed. And last year’s CfD auction was a flop, notably failing to secure any new offshore wind projects at the low prices on offer.
All eyes were thus on this year’s auction – where would things shake out? It’s a bit of something for everybody – see the table below. On the one hand, prices for offshore wind are clearly up a fair bit, from £37/MWh in 2022 to £59/MWh in 2024.
CfD prices compared
Note: AR 1-3 split prices based on delivery years, hence the multiple prices per technology. They are listed with the earliest delivery year first.
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Even so, after a bad year, offshore wind is back in a big way, even if some of that capacity is re-bid from previous rounds. Solar too has had a bumper year, and unlike the wind sector its costs have not increased much. And an onshore wind farm in England even squeaked through – and with the new Government ripping up the ridiculous planning laws holding them back, more will surely follow.
CfD results in GW compared (per CarbonBrief)
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So how do these results fit into our earlier discussion? Offshore wind has certainly come in higher than in previous rounds (which the sceptics will see as vindication), albeit lower than the maximum price set by the Government (£73/MWh). And there has been well-informed speculation that next year’s round will come in cheaper now that the sector has had a chance to ‘reset’.
But cheapness is only ever relative, in this case to wholesale power prices – after all, that’s what determines how much these contracts will cost or benefit consumers. (It’s worth flagging here that CfD results are reported in 2012 prices – useful for comparing apples to apples across rounds, but less so for situating these results in today’s market.)
The average price of power this year to date has been about £65/MWh, making the offshore contracts (at £82/MWh in today’s money) look particularly expensive. Of course, these projects will not be delivered this year, rather they’ll come online from 2026-2029 (depending on the project). Earlier this year, market forecasters Cornwall Insight put out their projections for the rest of the decade (see below), and relative to these projections solar and onshore wind look downright cheap (at £70-71/MWh), while offshore wind looks more reasonable.
But of course nobody truly knows where prices will go – just look at how much the projections changed in one quarter (the two different projection lines). And Cornwall thinks that more renewables on the system will itself drive lower power prices later this decade – an important secondary effect of these contracts.
Wholesale power projections (per Cornwall Insight)
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However, given all of this uncertainty, as a self-confessed green conservative, I’ve always been a bit wary of the green movement trumpeting the lower prices narrative. To my mind, we’re adding renewables to the grid because we need to decarbonise – there is no world in which we can avoid this. So the real question is not are renewables cheaper than the current system, but rather, what is the cheapest way we can decarbonise?
What’s the optimal mix of the various renewable technologies? Should we back them up with batteries, or hydrogen storage, or gas plants fitted with carbon capture? Could a fleet of new nuclear reactors, or even small modular ones, take up some of the slack at cheaper rates if we could get on with them at pace? It’s difficult to know, particularly as all of the latter technologies I’ve just mentioned were not competing in this auction, and have their own separate subsidy schemes.
But for me that’s the crucial question to answer, because if we want businesses to invest here and households not to be drowning in bills in 2030 (and 2035, and 2050), getting the cheapest mix of technologies will be key. Yet given how intent this Government (and previous ones) seems on centrally planning our energy mix rather than letting markets take the lead, I worry there is every risk of getting it wrong.
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