The mothballing of theatres means that it will probably be a while before we see a new production of ‘Waiting for Godot’.
But for utilities, ‘Waiting for the Energy White Paper’ continues to run and run. The energy minister told Utility Week’s Build Back Better Forum this week that the long-awaited policy blueprint will be published in the “next few weeks”.
The year-and-a-half (and counting) delay in the white paper’s publication means though that it will appear in radically different circumstances to those when former business secretary Greg Clark first trailed it in November 2018.
Now it will be framed by the wider government effort to rescue the pandemic-struck UK economy with a green stimulus package. The other key contextual difference will be the government’s summer 2019 commitment to reduce emissions to net zero by 2050.
If they can find any spare time from firefighting the coronavirus pandemic, ministers are due to unveil their green economy plans before the end of this month when the nationwide job furlough scheme finally winds down.
Boris Johnson sketched out a few of the details when he made his speech at the Conservative party conference earlier this month.
The virtual nature of the event, which was delivered to a largely empty studio rather than a hall packed with delegates, robbed the speech of much of its customary drama, while many observers noted the PM’s choice to focus on future plans rather than the messy present.
Those critics didn’t include the utilities sector, which was delighted that green energy was being treated as the centrepiece of the speech rather than the footnote status it has hitherto enjoyed.
Delivering on great ambition
The main meat in the speech was Johnson’s confirmation that the government will take forward the Conservatives election manifesto commitment to increase the UK’s offshore wind generating capacity to 40GW by 2030, up from the previous target of 30GW by the same date. Of that offshore capacity, Johnson said 1GW would be floating wind turbines.
Nick Molho, executive director of the Aldersgate Group says: “It’s a great ambition but we need to think how to deliver on the ground.”
So how feasible is Johnson’s plan?
Analysis carried out by research company Aurora earlier this year showed that 34.3GW of offshore wind projects with leasing rights were being pursued in UK waters. Another 5.8GW in the pipeline still required leasing rights.
Since it carried out this analysis, a further 3GW of additional offshore capacity has come onstream, increasing total capacity with leasing rights closer to 40GW, Martin Anderson, researcher at Aurora Projects reveals.
However, this capacity cannot be banked on, he warns: “There’s still long way to go and it takes a long time to come to market.”
Aurora estimates that to hit the government’s target, a new turbine will have to be installed every week of the decade, requiring £50 billion of capital investment.
Putting it another way, around 4GW of new offshore wind capacity will have to come online per annum during the second half of the 2020s.
That equates to the UK’s record annual delivery in 2017 when developers were rushing to complete projects in order to beat the deadline for the closure of the Renewable Obligation Certificate (ROC) subsidy scheme, says Anderson.
Rather than an annual one-off, this record performance will have to become the norm for offshore wind delivery, he says: “We have proved we can do it but you need to do that throughout the whole of the last years of the 2020s. It’s a big ask to do that over a sustained period of time.”
This will all be taking place at a time when other countries are gearing up their own offshore wind plans, creating increased competition for the highly specialised equipment required to deliver such projects.
These include the large vessels required to transport the increasingly massive turbine blades coming on stream out to where they are installed in the sea. As sites close to shore run out, developers will be increasingly eyeing up patches of the seabed further out in the deeper stretches North Sea. While the new turbines are getting increasingly better at exploiting wind power, erecting in remote locations will inevitably be a more expensive exercise.
“Bigger turbines means it is easier to get capacity but on the other hand bigger turbines are harder to instal. The big issue over the next ten years will be having enough ships to deploy,” says Anderson.
The £160 million worth of extra investment in ports will help eradicate potential bottlenecks along the coasts that will serve the new wind farms, says Molho.
CfD in the driving seat
The main mechanism for financing this step change in offshore delivery will be the Contracts for Difference (CfD) auctions. Alongside Johnson’s speech, the government announced a doubling of capacity for the next CfD auction, which will take place at the end of next year.
Increasing the cap on CfD auctions had previously been pushed for by the likes of SSE and Scottish Power.
The limits placed on bidding rounds by auction sizes meant that previous rounds delivered less capacity than they could have done, says Molho: “Some companies only bid for half of the size of the project they were going to initially bid for therefore you need fewer turbines and more expensive costs of electricity per turbine because you have the same base cost of development .”
As an example, he points to the Dogger Bank, which ended up being divided into three phases in order to meet the requirements of the CfD process.
“If you do it that way, it tends to be more expensive,” he says.
“Industry obviously wants to build as many of these projects as possible so by lifting the cap more come through,” says Anderson.
The greater chances of success in the auction will give developers more certainty about bidding, says James Brabben, wholesale manager at consultancy Cornwall Insight.
However, lifting the cap may alter the supply and demand dynamics of an auction process, which has delivered consistently plunging prices of renewable electricity over recent years.
Anderson says “They knew it had to go in very competitively. Projects realise they won’t be setting the (minimum) price point so there may be scope to get a higher price.”
Aurora estimates that increasing installed capacity to 40GW will require CfD payments to quintuple to £2.6 billion per annum.
The days of plunging CfD auction prices may be ending anyway, says Anderson: “It’s hard for the price to go much lower than they were last time. Improvements have largely come from technological improvements and can’t go much further.”
While 15MW turbines may be in the pipeline, they are likely to deliver more incremental price reductions than those achieved by the 12 and 13MW devices in recent years.
Molho says: “The rate of cost reductions in recent years has been so fast that it can’t be sustained forever. There will come a moment when the price starts to stabilise. Some projects will be further offshore which means better load factors but they will cost more upfront in term of transmission costs and maintenance.”
The PM’s commitment to bring forward 1GW of floating offshore could also push up the price of renewable electricity, he adds: “First of a kind projects will come at a higher cost.”
“With all technologies coming to the fore I think it will be able to be managed at a cost that is reasonable,” says Jess Ralston, energy analyst at the Energy and Climate Change Information Unit.
Price points
Another factor is that the 2020s projects will be competing with older wind farms developed over the last decade, which have exhausted their ROC or CfD contracts.
This will lead to a process of “cannibalisation”, says Anderson : “If you are expecting to be in a world of 40GW of offshore wind, the price of power will be much lower than if you weren’t expecting to be in that world, so you have to start pricing that in as well.”
Even renewable projects’ relatively fixed costs, such as maintenance, still stack up, he says: “If prices go below that point, there won’t be much point keeping them on. You could have projects mothballed because they are no longer economical to operate.”
What will provide investors with a greater incentive to invest will be if the CfD process provides a regular and visible pipeline of projects that the industry can plan for, Molho says “The mystery for industry has been the number of GWs being tendered for each round, and what the starting auction price will be. Government has an important job to state when auctions will take place and the volume and the cost envelope of each.”
He adds: “In order for the supply chain to exist, it needs to understand that there is a pipeline of work beyond one single auction. You need to be able to make an estimate of what the pipeline of projects might be, which has been very difficult until now. There are going to have to be really regular auctions.
“If you know you have a series of projects coming up, you can order in bulk.
“The more predictability on volumes and more ability to bid at volumes there is, the more you can get economies of scale and the cheaper it gets.”
“Fundamentally it depends on translating that quickly into concrete policy decisions around predictability of auctions for the rest of the decade.”
Rather than doubling the size of the next auction in 2021, it might be an even better idea to run smaller but more frequent auctions, Molho says, although stressing that this should not come at the cost of curbbing mega projects from coming forward.
“Industry has not liked the boom and bust,” says Molho, “More regular than not would work best but if you are doing it too regularly, you don’t want to rule out projects that are too big.”
But the PM’s target is not over-ambitious, he says: “It is important that 40GW is seen as a minimum and not a cap.”