Offshore wind power warning as government auction flops

Published

2 years ago

September 7, 2023

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Energy industry leaders have warned the UK could fall behind a key target for new offshore wind power ahead of the results of a government auction that is widely expected to flop.

Multiple industry sources have told Sky News the auction, the results of which are expected to be announced on Friday, has received little or no interest.

Insiders say the process has struggled to attract bidders because the government has set the maximum price generators can receive as too low, failing to reflect the rising costs of manufacturing and installing turbines.

The industry has been hit by inflation that has seen the price of steel rise by 40%, supply chain pressures and increases in the cost of financing.

Several companies, including the UK’s largest renewables generator SSE, have ruled themselves out of the auction, with one source saying the number of potential bidders was “between two and zero, with expectations at the lower end of that range”.

The renewables auction is an annual process in which the government attempts to incentivise private sector investment in a range of power sources through a mechanism known as “contracts for difference” (CfDs).

The auction works in reverse, with the government setting a maximum reference price, effectively a cap on what consumers can be charged, and in normal circumstances generators bid below that to provide power over a 15-year contract.

Under the CfD, generators are guaranteed a price for the power they produce, with the government making up the difference if wholesale prices fall below that price.

When wholesale prices are higher, as they have largely been since the Ukraine war began, generators pay the difference above the guaranteed price back to the Treasury.

‘The sums didn’t add up’

In theory this delivers value to consumers and suppliers but the chief executive of SSE, Alistair Phillips-Davies, told Sky News the price cap in this auction of £44MW/h, only a little above last year’s price, meant it was not viable.

“For the project we had, which is a little smaller than some and in deeper waters further north in the UK, we just wouldn’t have been able to even get a bid in at that cap price,” he said.

“The sums didn’t add up, we wouldn’t have been able to make an economic bid at that level. We’d have been struggling with write-offs, and we’ve seen some competitors in the sector have unfortunately suffered in recent weeks.”

Mr Phillips-Davies said the government needed to act now to ease market conditions for the renewables sector to ensure next year’s auction generated capacity.

He suggested additional taxes on renewables profits be withdrawn in 2024 rather than 2028, bringing the UK in line with Europe, extending capital allowances to compete with the US subsidy regime the Inflation Reduction Act (IRA), as well as ensuring a more realistic price cap in the next auction round.

He pointed to a recent auction in Ireland, operating under a different structure, that set a price of €150 MW/h.

He said: “I think people will need to look at the cap, while being sensitive to what consumers should be paying, and what we’ve got to do is be ambitious next year.

“We’ve got to be thoughtful about what we do and make sure that the next auction is constructed not only to get people to win an auction, but to actually build a piece of kit.”

This auction round, technically known as Allocation Round 5 (AR5) is expected to attract bids for solar and onshore wind capacity, but failure to secure significant new offshore wind capacity would be a blow to the government’s target of reaching 50GW by 2030.

‘Fingers in their ears’

It will also intensify the increasingly sharp debate over the true cost of achieving net zero to consumers and the public purse, as the energy transition moves from abstract policy theory to practical delivery.

Insiders say officials were repeatedly warned by industry that the auction would fail unless the price was increased.

Shadow energy secretary Ed Miliband said this week ministers “had put their fingers in their ears.”

The UK currently has 14GW of functioning offshore wind capacity, placing huge pressure on the next two annual auctions to fill the gap.

Offshore wind is the backbone of the UK’s renewable energy supply, providing 40% of electricity last year, and the target is a crucial plank in the wider goal of reaching net-zero by 2050.

Previous auctions have been successful in increasing offshore wind capacity, with last year’s round attracting 7GW of capacity from five operators.

One of those projects, run by Swedish state-owned power company Vattenfall, has already been mothballed however because of rising costs hitting the industry.

‘Very difficult market’ for offshore wind developers

Lisa Christie, UK country manager for Vattenfall, told Sky News the investment model no longer matched economic reality.

“The economics at the moment simply don’t stack up,” she said.

“There’s a number of reasons for that. It’s the war in Ukraine, we’ve seen rises in inflation, we’ve seen rises in the cost of capital, obviously rises in commodity costs.

“You put all of that together. And it’s just a very, very difficult market environment for offshore wind developers right now.

“I think we’re at a very difficult point. And we have a lot of offshore wind farms, including Vattenfall, that haven’t been able to take fields where perhaps you wouldn’t have expected them to do.

“So there is a challenge in the industry, I don’t think is insurmountable and there is still time for the government to turn this around.

“So what we’re really looking for is to put the CfDs back onto a financially sustainable footing and then we can reap the benefits that increased offshore wind deployment bring.”

Concerns UK will lose offshore wind superiority

Major suppliers to the industry are also concerned that any political drift in the build up to the election could see the UK lose its pre-eminence in offshore wind.

Laura Fleming, the UK managing director of Hitachi, which produces high-voltage direct cables that bring power onshore, said the UK needs to compete with more generous subsidy regimes around the world.

“The investment climate in the UK needs to send a clear signal that we are open for business, and compared to the IRA in the US, and the new green deal in Europe, we need to ensure that we still stand out.”

The renewables industry insists that even at a higher price in this auction, wind power would still be substantially cheaper than fossil fuel alternatives. At their peak last year wholesale gas prices were up to nine-times higher than offshore wind strike prices.

Renewables generated under CfDs can also return money to the taxpayer. Since the invasion of Ukraine forced up electricity prices many wind farms operating under CfDs have been paying back millions of pounds to the Treasury.

Mr Phillips-Davies said: “We’ve got to remember at the moment offshore wind is looking a bargain compared to wholesale energy prices. It’s half the price or less of where the current market is, so we need to be building more.”

Business

Trump trade war escalation sparks global market sell-off

Published

18 hours ago

April 3, 2025

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Trump trade war escalation sparks global market sell-off

Donald Trump’s trade war escalation has sparked a global sell-off, with US stock markets seeing the biggest declines in a hit to values estimated above $2trn.

Tech and retail shares were among those worst hit when Wall Street opened for business, following on from a flight from risk across both Asia and Europe earlier in the day.

Analysis by the investment platform AJ Bell put the value of the peak losses among major indices at $2.2trn (£1.7trn).

The tech-focused Nasdaq Composite was down 5.8%, the S&P 500 by 4.3% and the Dow Jones Industrial Average by just under 4% at the height of the declines. It left all three on course for their worst one-day losses since at least September 2022 though the sell-off later eased back slightly.

Trump latest: UK considers tariff retaliation

Analysts said the focus in the US was largely on the impact that the expanded tariff regime will have on the domestic economy but also effects on global sales given widespread anger abroad among the more than 180 nations and territories hit by reciprocal tariffs on Mr Trump‘s self-styled “liberation day”.

They are set to take effect next week, with tariffs on all car, steel and aluminium imports already in effect.

Price rises are a certainty in the world’s largest economy as the president’s additional tariffs kick in, with those charges expected to be passed on down supply chains to the end user.

The White House believes its tariffs regime will force employers to build factories and hire workers in the US to escape the charges.

Economists warn the additional costs will add upward pressure to US inflation and potentially choke demand and hiring, ricking a slide towards recession.

Apple was among the biggest losers in cash terms in Thursday’s trading as its shares fell by almost 9%, leaving it on track for its worst daily performance since the start of the COVID pandemic.

Concerns among shareholders were said to include the prospects for US price hikes when its products are shipped to the US from Asia.

Other losers included Tesla, down by almost 6% and Nvidia down by more than 6%.

Many retail stocks including those for Target and Footlocker lost more than 10% of their respective market values.

The European Union is expected to retaliate in a bid to put pressure on the US to back down.

The prospect of a tit-for-tat trade war saw the CAC 40 in France and German DAX fall by more than 3.4% and 3% respectively.

The FTSE 100, which is internationally focused, was 1.6% lower by the close – a three-month low.

Financial stocks were worst hit with Asia-focused Standard Chartered bank enduring the worst fall in percentage terms of 13%, followed closely by its larger rival HSBC.

Among the stocks seeing big declines were those for big energy as oil Brent crude costs fell back by 6% to $70 due to expectations a trade war will hurt demand.

The more domestically relevant FTSE 250 was 2.2% lower.

A weakening dollar saw the pound briefly hit a six-month high against the US currency at $1.32.

There was a rush for safe haven gold earlier in the day as a new record high was struck though it was later trading down.

Sean Sun, portfolio manager at Thornburg Investment Management, said of the state of play: “Markets may actually be underreacting, especially if these rates turn out to be final, given the potential knock-on effects to global consumption and trade.”

He warned there was a big risk of escalation ahead through countermeasures against the US.

Sandra Ebner, senior economist at Union Investment, said: “We assume that the tariffs will not remain in place in the
announced range, but will instead be a starting point for further negotiations.

“Trump has set a maximum demand from which the level of tariffs should decrease”.

She added: “Since the measures would not affect all regions and sectors equally, there will be winners and losers as in 2018 – although the losers are more likely to be in the EU than in North America.

“To protect companies in Europe from the effects of tariffs, the EU should not respond with high counter-tariffs. In any case, their impact in the US is not likely to be significant. It would be more efficient to provide targeted support to EU companies in the form of investment and stimulus.”

Business

British businesses issue warning over ‘deeply troubling’ Trump tariffs

Published

18 hours ago

April 3, 2025

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British businesses issue warning over 'deeply troubling' Trump tariffs

British companies and business groups have expressed alarm over President Donald Trump’s 10% tariff on UK goods entering the US – but cautioned against retaliatory measures.

It comes as Business Secretary Jonathan Reynolds launched a consultation with firms on taxes the UK could implement in response to the new levies.

Money blog: Pension top-up deadline days away

A 400-page list of 8,000 US goods that could be targeted by UK tariffs has been published, including items like whiskey and jeans.

On so-called “Liberation Day”, Mr Trump announced UK goods entering the US will be subject to a 10% tax while cars will be slapped with a 25% levy.

The government’s handling of tariff negotiations with the US to date has been praised by representative and industry bodies as being “cool” and “calm” – and they urged ministers to continue that approach by not retaliating.

Business lobby group the CBI (Confederation of British Industry) said: “Retaliation will only add to supply chain disruption, slow down investment, and stoke volatility in prices”.

Industry body the British Retail Consortium (BRC) also cautioned: “Retaliatory tariffs should only be a last resort”.

‘Deeply troubling’

While a major category of exports, in the form of services – like finance and information technology (IT) – has been exempted from the tariffs, the impact on UK business is expected to be significant.

Mr Trump’s announcement was described as “deeply troubling for businesses” by the CBI’s chief executive Rain Newton-Smith.

The Federation of Small Businesses (FSB) also said the tariffs were “a major blow” to small and medium companies (SMEs), as 59% of small UK exporters sell to the US. It called for emergency government aid to help those affected.

“Tariffs will cause untold damage to small businesses trying to trade their way into profit while the domestic economy remains flat,” the FSB’s policy chair Tina McKenzie said. “The fallout will stifle growth” and “hurt opportunities”, she added.

Companies will need to adapt and overcome, the British Export Association said, but added: “Unfortunately adaptation will come at a cost that not all businesses will be able to bear.”

Watch dealer and component seller Darren Townend told Sky News the 10% hit would be “painful” as “people will buy less”.

“I am a fan of Trump, but this is nuts,” he said. “I expect some bad months ahead.”

Industry body Make UK said the 25% tariffs on cars, steel and aluminium would in particular be devastating for UK manufacturing.

Cars hard hit

Carmakers are among the biggest losers from the world trade order reshuffle.

Auto industry body the Society of Motor Manufacturers and Traders (SMMT) said the taxes were “deeply disappointing and potentially damaging measure”.

“These tariff costs cannot be absorbed by manufacturers”, SMMT chief executive Mike Hawes said. “UK producers may have to review output in the face of constrained demand”.

The new taxes on cars took effect on Thursday morning, while the measures impacting car parts are due to come in on 3 May.

Business

Trump trade war: The blunt calculation that should have spared UK from reciprocal tariffs

Published

18 hours ago

April 3, 2025

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Trump trade war: The blunt calculation that should have spared UK from reciprocal tariffs

Economists immediately started scratching their heads when Donald Trump raised his tariffs placard in the Rose Garden on Wednesday.

On that list he detailed the rate the US believes it is being charged by each country, along with its response: A reciprocal tariff at half that rate.

So, take China for example. Donald Trump said his team had run the numbers and the world’s second-largest economy was implementing an effective tariff of 67% on US imports. The US is responding with 34%.

Trump latest: UK considers tariff retaliation

How did he come up with that 67%? This is where things get a bit murky. The US claims it studied its trading relationship with individual countries, examining non-tariff barriers as well as tariff barriers. That includes, for example, regulations that make it difficult for US exporters.

However, the actual methodology appears to be far cruder. Instead of responding to individual countries’ trade barriers, Trump is attacking those enjoying large trade surpluses with the US.

A formula released by the US trade representative laid this bare. It took the US’s trade deficit in goods with each country and divided that by imports from that country. That figure was then divided by two.

So, in the case of China, which has a trade surplus of $295bn on total US exports of $438bn, that gives a ratio of 68%. The US divided that by two, giving a reciprocal tariff of 34%.

This is a blunt measure which targets big importers to the US, irrespective of the trade barriers they have erected. This is all part of Donald Trump’s efforts to shrink the country’s deficit – although it’s US consumers who will end up paying the price.

But what about the small number of countries where the US has a trade surplus? Shouldn’t they actually be benefiting from all of this?

That includes the UK, with whom the US has a surplus (by its own calculations) of $12bn. By its own reciprocal tariff formula, the UK should be benefitting from a “negative tariff” of 9%.

Instead, it has been hit by a 10% baseline tariff. Number 10 may be breathing a sigh of relief – the US could, after all, have gone after us for our 20% VAT rate on imports, which it takes issue with – but, by Trump’s own measure, we haven’t got off as lightly as we should have.