Offshore wind and the energy transition
With climate change continually at the forefront of the news agenda and millions striking across the globe, September was also a significant month in the development of offshore wind in the UK.
Two important milestones were reached in terms of future offshore wind projects – the award of 5.5GW of Contracts for Difference (CfD) for the next generation of projects in the UK, and the launch by the Crown Estate of round four for new offshore developments – both of which will have a significant impact on the wider energy sector and accelerating many aspects of the energy transition.
CfD awards and pricing
Offshore wind dominated the recent third CfD auction, with 5.5 gigawatts of projects securing support. With prices starting as low as £39.65 per megawatt-hour, six offshore wind farms were awarded contracts at prices 30% lower than the previous auction in 2017.
The cost of offshore wind dropping to such levels demonstrates the sector’s undoubted success in reducing costs and mitigating the risks of offshore development.
As a result, projects are now likely to come online below market prices and without additional subsidy on bills, thus providing a potentially significant windfall for the UK Government in respect of the sums being paid back by generators, when the market price is in excess of the strike price.
In the midst of the climate change rhetoric in the news, there is an important media message to be made about the success of offshore wind and what it will ultimately give back to the UK economy – not just in terms of renewable energy generation, but in monetary terms and the potential boost to the supply chain of an estimated 8,000 jobs being created to service the next generation of offshore wind.
Round 4 leasing
The second significant offshore wind announcement was the launch by the Crown Estate of its round four offshore wind leasing competition for the rights to develop at least 7GW of new capacity off England and Wales.
Crown Estate Scotland is expected to shortly launch its own ScotWind leasing competition for the development of projects off the Scottish coast.
Building on the success of round three and offshore wind’s participation in CfD auctions, the development of new offshore wind projects represents a significant opportunity to capitalise on the Offshore Wind Sector Deal agreed with government earlier this year.
It is also a key step in enshrining offshore wind in the UK electricity system, tackling the energy trilemma of reducing carbon emissions, ensuring security of supply and lowering the cost of energy. By 2030, it is expected that around a third of the UK’s electricity will come from offshore wind.
Taken together, both announcements are important in the context of the wider energy transition taking place in the sector.
Given the size and scale of offshore development, the government commitment to offshore wind and a decade of new development ahead, at Burness Paull we are seeing significant opportunities across the entire spectrum of offshore wind development.
At a local level, there are key roles for oil and gas services companies and contractors to provide the necessary expertise required for offshore development, with a number of traditional oil and gas entities entering the renewables sector in an important way.
On a larger scale, there is substantial interest from traditional oil and gas majors looking to invest heavily in the renewables sector and either acquire assets or lead the development of new projects.
Orsted and Equinor have already diversified and made the move to offshore wind, with Equinor being one of the big winners in the recent CfD auction.
With the potential for a new generation of projects being developed at half the cost of previous years, we expect that the round four and ScotWind leasing rounds will be highly competitive and represent a significant step forward in the energy transition for a number of key parties.
Will this be the round where oil and gas majors compete for zones with traditional renewable energy companies? It may very well be.
Note: This article was first published in Energy Voice, 9th October 2019.
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