In the UK, offshore wind defies competition

Jul 27, 2022 @ 4:16pm,
Updated on July 28, 2022 at 09:30

Reading time: 6 minutes

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Yves Heuillard is an engineer and journalist.

In the UK, the results of the largest ever tender for the supply of renewable electricity were announced on July 7th. Despite rising commodity prices, price offers for electricity from new offshore wind turbines are 5.8% lower % to those of 2019 and almost 70 % compared to 2015.

The UK government tender auctioned for the supply of 7 gigawatts (7 billion watts) of offshore wind power [1]after a system called CFDs (Contract for Difference, in French contract for the difference). Here is the basic principle:

• Generators offer to the government to supply electricity at a certain price ;
• If the price is accepted, the government agrees to pay the difference between the market price and the guaranteed price – if the market price is lower ;
• but if the market price is higher, the government will collect the difference between the guaranteed price and the market price.

This type of tender is very common in Europe and shows the cost of the electricity produced by sector. Prices tend towards the cost of production to which is added the manufacturer’s margin. The contracts in question have a term of fifteen years and are indexed to inflation. The affected wind turbines will go into operation in 2026 and 2027.

Also read: Offshore wind threatens biodiversity

The highest bidders in the tender agreed to sell power from yet-to-be-built offshore wind turbines at inflation-adjusted prices as low as £37.35 per megawatt-hour in 2012 currency, or at the time of writing €53.7 per megawatt-hour or ever still 5.37 cents per kilowatt hour. Among those top bidders is Denmark’s Orsted for a 2.8 gigawatt wind farm in the North Sea, 160 kilometers from the Yorkshire coast [2].

In seven years, the price of offshore wind power has more than tripled

This result is interesting because the price of wind turbines has increased due to the increase in raw material prices, to which is added supply difficulties and strong demand due to the international situation. These rates are still 5.8 % less than 2019 and 69 % below those of 2015. In seven years, the price of offshore wind power has more than tripled despite very unfavorable economic conditions. The main reasons for this decline are of magnitude: larger and taller rotors multiply the efficiency of wind turbines (doubling the size quadruples the amount of electricity produced).

We can compare this price with a similar situation in France. In 2019, a group of companies took over EDF Renewable energies have won the tender for the Dunkirk marine wind farm (600 megawatts) at a state-guaranteed price of 44 euros per megawatt hour and commissioning in 2027. It is difficult to compare with recent UK tenders (different contract type, twenty year term, indexing not communicated, much closer distance to coast) but the price, which was hailed as very competitive then – and still is – is there of the same order of magnitude as that of today’s British contracts.

We can also compare the English wind energy contract with that of the British government EDF for the construction of two-type reactors ERP at Hinkley Point, Wales. It’s the same country, same contract type (contract for difference), same reference currency (sterling 2012). It is about the commissioning of the two reactors in 2027. The contract was signed in 2013 between EDF and the UK reports a price of £92.5 per megawatt hour, the price is indexed to inflation and, importantly, for a period of thirty-five years. In 2027, therefore, the British are paying 2.5 times more for the electricity supplied by the Hinkley Point reactors than for wind power produced at sea.

It should be added that the terms of the Hinkley Point contract were negotiated on the basis of a cost of £14 billion for the two reactors. At the time of signing on October 21, 2013 EDF had reestimated the cost to £16 billion in 2012, with commissioning planned for 2023. After many setbacks and deviations EDF today announces an estimated cost of between £25 billion and £26 billion in 2015 and the first unit to be operational in June 2027 “ a delivery delay risk estimated at fifteen months, assuming the absence of an epidemic wave and the additional effects of the war in Ukraine ».

On the revenue side, the contract is signed between EDF and the UK sets the price of electricity independently of markets. And so these slips in costs (+60 %), operating losses and the extension of the financing period due to the accumulated delays have to be borne by the company [3]. Some analysts believe the additional costs and delays are threatening the project’s viability. Be that as it may, in the UK, offshore wind turbines take precedence over continental nuclear power stations.