‘Negative subsidies’ forecast as offshore wind costs plummet
Energy bills for people in the UK could drop thanks to the latest round of offshore wind farms that should be able to produce electricity very cheaply.
While renewable energy projects, including onshore and offshore wind and solar farms, have so far been subsidised by government support schemes, the most recently approved projects are expected to generate ‘negative subsidies’ that will see the operators pay money back to the government.
This will go towards reducing household energy bills as the offshore wind farms start producing power in the mid-2020s.
This is the conclusion of an analysis by an international team led by Imperial College London researchers.
Lead researcher Dr Malte Jansen, from the Centre for Environmental Policy at Imperial, said: “Offshore wind power will soon be so cheap to produce that it will undercut fossil-fuelled power stations and may be the cheapest form of energy for the UK.
“Energy subsidies used to push up energy bills, but within a few years cheap renewable energy will see them brought down for the first time. This is an astonishing development.”
The researchers’ analysis looked at five countries in Europe, including the UK, and focused on a series of government auctions for offshore wind farms between February 2015 and September 2019.
Companies that want to build wind farms bid in the auctions by stating the price at which they will sell the energy they produce to the government.
These are known as ‘contracts for difference’ or CfDs. If a company’s bid is higher than the wholesale electricity price on the UK market once the wind farm is up and running, then the company will receive a subsidy from the government to top up the price.
However, if the stated price is less than the wholesale price, then the company will pay the government back the difference. This payback is then passed through to consumer’s energy bills, reducing the amount that homes and businesses will pay for electricity.
Between 2013-2017, analysis showed that the cost of producing electricity from offshore wind farms in the UK fell by about a third with the price continuing to fall even further since.
The UK also auctioned off swathes of space for offshore wind in September 2019 with winning companies saying they could build new facilities that would generate electricity for just £40 per megawatt-hour (MWh).
For comparison, the in-construction Hinkley Point C nuclear power plant in Suffolk is expected to generate electricity at £92.50 per MWh.
The researchers analysed likely future electricity price trends and found that contracted price for offshore wind is very likely to be below the UK wholesale price over the lifetime that these wind farms would produce electricity, from the mid-2020s onwards.
Dr Iain Staffell, from the Centre for Environmental Policy at Imperial, said: “The price of offshore wind power has plummeted in only a matter of a decade, surprising many in the field. The UK auctions in September 2019 gave prices that were around one-third lower than those of the last round in 2017, and two-thirds lower than we saw in 2015.
“This amazing progress has been made possible by new technology, economies of scale and efficient supply chains around the North Sea, but also by a decade of concerted policymaking designed to reduce the risk for investing in offshore wind, which has made financing these huge billion-pound projects much cheaper.
“These new wind farms set the stage for the rapid expansion needed to meet the government’s target of producing 30 per cent of the UK’s energy needs from offshore wind by 2030. Offshore wind will be pivotal in helping the UK, and more broadly the world, to reach net-zero carbon emissions with the added bonus of reducing consumers’ energy bills.”
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