Offshore wind power warning as government auction flops
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).
SSE is among major players to have boycotted the auction
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.
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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.
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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.
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Wind turbine catches fire off Norfolk coast
“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
Donald Trump’s tariffs will have consequences for globalisation, the US economy and geopolitics
For decades, trade and trade policy has been an economic and political backwater – decidedly boring, seemingly uncontroversial.
Trade was mostly free and getting freer, tariffs were getting lower and lower, and the world was becoming more, not less, globalised.
But alongside those long-term trends, there were some serious consequences.
Trump latest: US president announces sweeping global trade tariffs
Mature, developed economies like the UK and US became ever more reliant on cheap imports from China and, in the process, saw their manufacturing sectors shrink.
Large swathes of the rust belt in the US – and much of the Midlands and North of England – were hollowed out.
And to some extent that’s where the story of Donald Trump’s “Liberation Day” really began – with the notion that free trade and globalisation had a darker side, a side he wants to remedy via tariffs.
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Trump’s tariffs: Ed Conway analysis
He imposed a set of tariffs in his first term, some on China, some on specific materials like steel and aluminium. But the height and the breadth of those tariffs were as nothing compared with the ones we have just heard about.
Not since the 1930s has the US so radically increased the level of tariffs on all nations across the world. Back then, those tariffs exacerbated the Great Depression.
It’s anyone’s guess as to what the consequences of these ones will be. But there will be consequences.
Consequences for the nature of globalisation, consequences for the US economy (tariffs are exceptionally inflationary), consequences for geopolitics.
Imports from the UK will face a 10% tariff, while EU goods will see 20% rates. Pic: Reuters
And to some extent, merely knowing that little bit more about the White House’s plans will deliver a bit of relief to financial markets, which have fretted for months about the imposition of tariffs. That uncertainty recently reached unprecedented levels.
But don’t for a moment assume that this saga is over. Nothing of the sort. In the coming days, we will learn more – more about the nuts and bolts of these policies, more about the retaliatory measures coming from other countries.
We will, possibly, get more of a sense about whether some countries – including the UK – will enjoy reprieves from the tariffs.
To paraphrase Churchill, this isn’t the end of the trade war, or even the beginning of the end – perhaps just the end of the beginning.
Donald Trump has announced a 10% trade tariff on all imports from the UK – as he unleashed sweeping tariffs across the globe.
Speaking at a White House event entitled “Make America Wealthy Again”, the president held up a chart detailing the worst offenders – which also showed the new tariffs the US would be imposing.
“This is Liberation Day,” he told a cheering audience of supporters, while hitting out at foreign “cheaters”.
Follow live: Trump tariffs latest
He claimed “trillions” of dollars from the “reciprocal” levies he was imposing on others’ trade barriers would provide relief for the US taxpayer and restore US jobs and factories.
Mr Trump said the US has been “looted, pillaged, raped, plundered” by other nations.
Pic: AP
His first tariff announcement was a 25% duty on all car imports from midnight – 5am on Thursday, UK time.
Mr Trump confirmed the European Union would face a 20% reciprocal tariff on all other imports. China’s rate was set at 34%.
The UK’s rate of 10% was perhaps a shot across the bows over the country’s 20% VAT rate, though the president’s board suggested a 10% tariff imbalance between the two nations.
It was also confirmed that further US tariffs were planned on some individual sectors including semiconductors, pharmaceuticals and critical mineral imports.
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Trump’s tariffs explained
The ramping up of duties promises to be painful for the global economy. Tariffs on steel and aluminium are already in effect.
The UK government signalled there would be no immediate retaliation.
Business and Trade Secretary Jonathan Reynolds said: “We will always act in the best interests of UK businesses and consumers. That’s why, throughout the last few weeks, the government has been fully focused on negotiating an economic deal with the United States that strengthens our existing fair and balanced trading relationship.
“The US is our closest ally, so our approach is to remain calm and committed to doing this deal, which we hope will mitigate the impact of what has been announced today.
“We have a range of tools at our disposal and we will not hesitate to act. We will continue to engage with UK businesses including on their assessment of the impact of any further steps we take.
“Nobody wants a trade war and our intention remains to secure a deal. But nothing is off the table and the government will do everything necessary to defend the UK’s national interest.”
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Who showed up for Trump’s tariff address?
The EU has pledged to retaliate, which is a problem for Northern Ireland.
Should that scenario play out, the region faces the prospect of rising prices because all its imports are tied to EU rules under post-Brexit trading arrangements.
It means US goods shipped to Northern Ireland would be subject to the EU’s reprisals.
The impact of a trade war would be expected to be widely negative, with tit-for-tat tariffs risking job losses, a ramping up of prices and cooling of global trade.
Research for the Institute for Public Policy Research has suggested more than 25,000 direct jobs in the UK car manufacturing industry alone could be at risk from the tariffs on car exports to the US.
The Society of Motor Manufacturers and Traders (SMMT) had said the tariff costs could not be absorbed by manufacturers and may lead to a review of output.
The tariffs now on UK exports pose a big risk to growth and the so-called headroom Chancellor Rachel Reeves was forced to restore to the public finances at the spring statement, risking further spending cuts or tax rises ahead to meet her fiscal rules.
Read more:
What do Trump’s tariffs mean for the UK?
The rewards and risks for US as trade war intensifies
A member of the Office for Budget Responsibility (OBR), David Miles, told MPs on Tuesday that US tariffs at 20% or 25% maintained on the UK for five years would “knock out all the headroom the government currently has”.
But he added that a “very limited tariff war” that the UK stays out of could be “mildly positive”.
He said: “There’s a bit of trade that will get diverted to the UK, and some of the exports from China, for example, that would have gone to the US, they’ll be looking for a home for them in the rest of the world.
“And stuff would be available in the UK a bit cheaper than otherwise would have been. So there is one, not central scenario at all, which is very, very mildly potentially positive to the UK. All the other ones which involve the UK facing tariffs are negative, and they’re negative to very different extents.”
Business
Donald Trump’s tariffs will have consequences for globalisation, the US economy and geopolitics
For decades, trade and trade policy has been an economic and political backwater – decidedly boring, seemingly uncontroversial.
Trade was mostly free and getting freer, tariffs were getting lower and lower, and the world was becoming more, not less, globalised.
But alongside those long-term trends, there were some serious consequences.
Trump latest: US president announces sweeping global trade tariffs
Mature, developed economies like the UK and US became ever more reliant on cheap imports from China and, in the process, saw their manufacturing sectors shrink.
Large swathes of the rust belt in the US – and much of the Midlands and North of England – were hollowed out.
And to some extent that’s where the story of Donald Trump’s “Liberation Day” really began – with the notion that free trade and globalisation had a darker side, a side he wants to remedy via tariffs.
He imposed a set of tariffs in his first term, some on China, some on specific materials like steel and aluminium. But the height and the breadth of those tariffs were as nothing compared with the ones we have just heard about.
Not since the 1930s has the US so radically increased the level of tariffs on all nations across the world. Back then, those tariffs exacerbated the Great Depression.
It’s anyone’s guess as to what the consequences of these ones will be. But there will be consequences.
Consequences for the nature of globalisation, consequences for the US economy (tariffs are exceptionally inflationary), consequences for geopolitics.
Imports from the UK will face a 10% tariff, while EU goods will see 20% rates. Pic: Reuters
And to some extent, merely knowing that little bit more about the White House’s plans will deliver a bit of relief to financial markets, which have fretted for months about the imposition of tariffs. That uncertainty recently reached unprecedented levels.
But don’t for a moment assume that this saga is over. Nothing of the sort. In the coming days, we will learn more – more about the nuts and bolts of these policies, more about the retaliatory measures coming from other countries.
We will, possibly, get more of a sense about whether some countries – including the UK – will enjoy reprieves from the tariffs.
To paraphrase Churchill, this isn’t the end of the trade war, or even the beginning of the end – perhaps just the end of the beginning.
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