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27 September 2019

Fresh parity contracts show times are changing in UK offshore wind

At the tail end of last week, a number of publications picked up on the latest offshore wind auction, and pricing went as low as £39.65 (around $50). This was for around 5.5 GW of offshore wind capacity.

This is a big step down from the last auction in 2017 which settled at £57.50 ($71). Companies which won biggest winners (PDF) included SSE, Equinor and Innogy.

Actually a combined bid by SSE (Scottish and Southern Energ) and Equinor won multiple bids, three projects for offshore wind in the Dogger Bank region of the North Sea at Creyke Beck A and B, and Teeside A, which between them offer a total capacity of 3.6 GW. The joint venture will be seeking what is referred to as non-recourse project financing, which takes repayments from the profits of the project. There will be a queue.

These turbines are located 130 km east of the Yorkshire Coast in the UK North Sea in water depths of just 20 to 35 meters. Essentially, they will not go live until 2023 at the earliest. They sit on a sea region lease which is offered for 50 years and will rely on next generation turbines, the only one of which exists right now is the GE Haliade X, but both Vestas and Siemens Gamesa are expected to have 10 MW class wind turbines in plenty of time for 2023. The turbines are expected to be sat on a monopile in the seabed.

SSE has won its own Seagreen Phase 1, CfD for 454 MW in the Firth of Forth off the Scottish coast, Seagreen has a total capacity of 1,075 MW across two projects and the CfD contract represents just 42% of the total project capacity and it will now progress to financing and an equity stake sell-down and a final investment decision in early 2020.

The transmission to the land from the Dogger bank projects is such a long way out it will use direct current due to the long distances involved, so there will need to be inverters installed offshore. This is a first for DC for offshore wind in the UK.

The UK uses something called a Contract for Difference (CfD) which offers contracts at a given strike price. If the wholesale power price drops below that rate, the government tops up their revenue to match it. If the wholesale price is above the strike price, the project owner pays the difference back to the government.

These contracts are set for 15 years and are inflation linked. After the CfD support, each project will receive the market price for electricity, which is likely to be above this fixed price – so in a sense these are already parity projects.

The only other contract went to German company Innogy, which clarified the basis of its asset swap last week with RWE in Germany. We are not sure if this contract will end up with RWE, since it will have most of the Innogy renewables businesses, including its pipeline, which this must be in.  It has won with its 1.4 GW Sofia offshore windfarm on the same basis.

The Sofia farm is even further out some 195 km off the UK coast of Dogger Bank. The projects must all get 50% of capacity online sometime in 2023, and the ret in the 20224/5 timeframe.

Given that currently the 2024 UK wholesale electricity price will be around £58 per megawatt-hour, this will be entirely a parity deal, yielding cash to the government, rather than costing it.

This then sets the standard for operating in the future, with the government able to be passive in setting a strike price below anticipated wholesale prices, and acting only as surety when they are not, but the actual supply costing nothing. This then will make a refreshing difference from the way the nuclear industry has tried to pin the UK government down to pay before the energy is produced, and to charge a premium to customers to offset this cost, and then comes back, as it did this week with Hinkley Point, and add huge sums of extra payment due to its own process delays.

The UK has set its stall out to buy 2 GW of wind every year up until 2030, and it claims to have already created 27,000 jobs on the back of these auctions.

If these continue without any negative incidents, the comfort they will provide will make further nuclear capacity, especially of the gargantuan size of Hinkley Point, will not been seen again in the UK. Hinkley uses the Pressurized Water Reactor (PWR) design which France’s EDF is known for, but the trend is to work toward smaller, localized reactors in future designs.

The tender did not allow any untried technology to be bid, and it also awarded 33.6 MW in advanced waste-to-energy projects and 275 megawatts of “remote island wind” projects built on Scotland’s windier and more far-flung islands.