The Offshore Renewable Energy Catapult has predicted that the UK’s first subsidy-free offshore wind project will be given the go-ahead during 2020.
The latest Contracts for Difference auction in September 2019 cleared at around £40/MWh – less than the government’s forecasts for capture prices over the early years of the agreements, suggesting that generators may initially be required to return money to consumers.
With strike prices likely to continue falling, some developers may see “potential upsides” in building projects on a merchant basis, said Tom Quinn, analysis and insight manager for ORE Catapult.
“It does come with the challenge that it might be harder to finance because of the higher risk involved compared to having that guaranteed strike price,” he qualified.
Gavin Smart, head of insights and analysis at ORE Catapult, highlighted the potential for developers to pursue hybrid projects, which have guaranteed revenues for some of their capacity but are otherwise operated on a merchant basis.
“One of the things that’s driving cost reductions is project scale, as well as turbine size and a lower cost of capital,” he explained.
“Projects getting bigger may be driving down the costs but it also means that if auctions are going to be capacity constrained as well as budget constrained then it might make more sense to bid in partial capacities to make sure you get it.”
Quinn said the proliferation of storage which allows generators to “delay when you send out your power” could also offer some protection against falling power prices, adding: “Whether or not the costs of the storage are going to make up for that really depends on the pace of innovation and cost-reduction across different solutions.”
Earlier this week, the government awarded funding to two innovation projects that aim to store energy from offshore windfarms by using it to produce hydrogen.