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UK government: wind energy is cheaper than nuclear

This author no longer works for DNV GL.

The UK woke up this morning to the news of an announcement about support for wind energy. We were told to prepare for major changes to the relative levels of support for onshore and offshore wind and solar energy—to the benefit of offshore wind.

But when the hotly anticipated “National Infrastructure Plan” was eventually released, many were underwhelmed. Onshore wind and large scale solar tariffs were indeed considerably reduced from previously announced levels (down by £10/MWh by 2018 for solar) but the changes to the offshore wind tariff were modest and not scheduled to come into force for at least 5 years.

While welcome, the increased tariff needs to be considered in light of the highly uncertain policy environment faced by UK offshore wind developers. The government has committed to keeping spending on renewables within an envelope known as the Levy Control Framework. Our analysis strongly suggests that the total value of the available pot (about £7bn p.a. by 2020 in today’s prices) is not large enough to support all of the capacity currently in development.

In the likely event of an oversupply of projects, support will be rationed on a cost-competitive basis, rendering the announced tariff a theoretical maximum rather than a guaranteed price. If the intention is to shore up confidence in offshore wind then an announcement about the maximum price projects may receive in five years is unlikely to do much to salve investors’ worries that projects may not receive anything at all.

Anybody familiar with UK energy policy will not be shocked to learn that the announcement has as much to do with short-term politicking as long-term infrastructure investment. By making a show of limiting support for onshore wind the government may quieten some of the strongly anti-wind members of governing Conservative party.

Similarly, those who believe that the government should be doing more to boost British industry and jobs will be happy to learn that offshore wind—a technology in which the UK has considerable competitive advantage—has been thrown a bone. And the timing, just 24 hours ahead of the government’s annual update on the state of the economy—and what they are doing about it—is also important.

But, beyond the price announcement, the National Infrastructure Plan does include some interesting developments. We learned, for example, that 16 renewable energy projects with a total capacity of 8GW are close to receiving a fixed price contract with the government under their Final Investment Decision Enabling (FIDe) programme. Importantly, FIDe projects are to be funded from the same, limited pot of cash as those projects not in negotiations. The majority are offshore wind farms and, if successful, will move forward with a government contract at a negotiated price.

Our analysis indicates that up to 3GW of offshore wind could be built under the FIDe arrangement—making a serious dent in the funding available for projects not in negotiations and rendering the touted increase in tariff even less relevant.

Finally, and perhaps most important, is the revelation that the British government now believes that the levelised cost of onshore wind by the end of the decade will be no more than £90/MWh. It is gratifying to compare this with the 35 year, £92.50/MWh contract  announced for the UK’s next nuclear power station set to start operations in 2023.

These prices make onshore wind the UK’s cheapest form of new low-carbon power generation. If that’s not good news, I don’t know what is.

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