Offshore wind power warning as government auction flops

Published

1 year 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

FTSE 100 closes at record high

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1 hour ago

January 17, 2025

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The UK’s benchmark stock index has reached another record high.

The FTSE 100 index of most valuable companies on the London Stock Exchange closed at 8,505.69, breaking the record set last May.

It had already broken its intraday high at 8532.58 on Friday afternoon, meaning it reached a high not seen before during trading hours.

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The weakened pound has boosted many of the 100 companies forming the top-flight index.

Why is this happening?

Most are not based in the UK, so a less valuable pound means their sterling-priced shares are cheaper to buy for people using other currencies, typically US dollars.

This makes the shares better value, prompting more to be bought. This greater demand has brought up the prices and the FTSE 100.

The pound has been hovering below $1.22 for much of Friday. It’s steadily fallen from being worth $1.34 in late September.

Also spurring the new record are market expectations for more interest rate cuts in 2025, something which would make borrowing cheaper and likely kickstart spending.

What is the FTSE 100?

The index is made up of many mining and international oil and gas companies, as well as household name UK banks and supermarkets.

Familiar to a UK audience are lenders such as Barclays, Natwest, HSBC and Lloyds and supermarket chains Tesco, Marks & Spencer and Sainsbury’s.

Other well-known names include Rolls-Royce, Unilever, easyJet, BT Group and Next.

FTSE stands for Financial Times Stock Exchange.

If a company’s share price drops significantly it can slip outside of the FTSE 100 and into the larger and more UK-based FTSE 250 index.

The inverse works for the FTSE 250 companies, the 101st to 250th most valuable firms on the London Stock Exchange. If their share price rises significantly they could move into the FTSE 100.

A good close for markets

It’s a good end of the week for markets, entirely reversing the rise in borrowing costs that plagued Chancellor Rachel Reeves for the past ten days.

Fears of long-lasting high borrowing costs drove speculation she would have to cut spending to meet self-imposed fiscal rules to balance the budget and bring down debt by 2030.

Long-term government borrowing had reached a high not seen since 1998 while the benchmark 10-year cost of government borrowing, as measured by 10-year gilt yields, was at levels last seen around the 2008 financial crisis.

The gilt yield is effectively the interest rate investors demand to lend money to the UK government.

Only the pound has yet to recover the losses incurred during the market turbulence. Without that dropped price, however, the FTSE 100 record may not have happened.

Also acting to reduce sterling value is the chance of more interest rates. Currencies tend to weaken when interest rates are cut.

Business

Trump tariff threat prompts IMF warning ahead of inauguration

Published

4 hours ago

January 17, 2025

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Trump tariff threat prompts IMF warning ahead of inauguration

The International Monetary Fund (IMF) has warned against the prospects of a renewed US-led trade war, just days before Donald Trump prepares to begin his second term in the White House.

The world’s lender of last resort used the latest update to its World Economic Outlook (WEO) to lay out a series of consequences for the global outlook in the event Mr Trump carries out his threat to impose tariffs on all imports into the United States.

Canada, Mexico, and China have been singled out for steeper tariffs that could be announced within hours of Monday’s inauguration.

Mr Trump has been clear he plans to pick up where he left off in 2021 by taxing goods coming into the country, making them more expensive, in a bid to protect US industry and jobs.

He has denied reports that a plan for universal tariffs is set to be watered down, with bond markets recently reflecting higher domestic inflation risks this year as a result.

While not calling out Mr Trump explicitly, the key passage in the IMF’s report nevertheless cautioned: “An intensification of protectionist policies… in the form of a new wave of tariffs, could exacerbate trade tensions, lower investment, reduce market efficiency, distort trade flows, and again disrupt supply chains.

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“Growth could suffer in both the near and medium term, but at varying degrees across economies.”

In Europe, the EU has reason to be particularly worried about the prospect of tariffs, as the bulk of its trade with the US is in goods.

The majority of the UK’s exports are in services rather than physical products.

The IMF’s report also suggested that the US would likely suffer the least in the event that a new wave of tariffs was enacted due to underlying strengths in the world’s largest economy.

The WEO contained a small upgrade to the UK growth forecast for 2025.

It saw output growth of 1.6% this year – an increase on the 1.5% figure it predicted in October.

Economists see public sector investment by the Labour government providing a boost to growth but a more uncertain path for contributions from the private sector given the budget’s £25bn tax raid on businesses.

Business lobby groups have widely warned of a hit to investment, pay and jobs from April as a result, while major employers, such as retailers, have been most explicit on raising prices to recover some of the hit.

Chancellor Rachel Reeves said of the IMF’s update: “The UK is forecast to be the fastest growing major European economy over the next two years and the only G7 economy, apart from the US, to have its growth forecast upgraded for this year.

“I will go further and faster in my mission for growth through intelligent investment and relentless reform, and deliver on our promise to improve living standards in every part of the UK through the Plan for Change.”

Business

Run of bad economic data brings end to market turbulence and interest rate benefits as three Bank cuts expected for 2025

Published

4 hours ago

January 17, 2025

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Run of bad economic data brings end to market turbulence and interest rate benefits as three Bank cuts expected for 2025

A week of news showing the UK economy is slowing has ironically yielded a positive for mortgage holders and the broader economy itself – borrowing is now expected to become cheaper faster this year.

Traders are now pricing in three interest rate cuts in 2025, according to data from the London Stock Exchange Group.

Earlier this week just two cuts were anticipated. But this changed with the release of new official statistics on contracting retail sales in the crucial Christmas trading month of December.

It firmed up the picture of a slowing economy as shrunken retail sales raise the risk of a small GDP fall during the quarter.

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That would mean six months of no economic growth in the second half of 2024, a period that coincides with the tenure of the Labour government, despite its number one priority being economic growth.

Clearer signs of a slackening economy mean an expectation the Bank of England will bring the borrowing cost down by reducing interest rates by 0.25 percentage points at three of their eight meetings in 2025.

If expectations prove correct by the end of the year the interest rate will be 4%, down from the current 4.75%. Those cuts are forecast to come at the June and September meetings of the Bank’s interest rate-setting Monetary Policy Committee (MPC).

The benefits, however, will not take a year to kick in. Interest rate expectations can filter down to mortgage products on offer.

Despite the Bank of England bringing down the interest rate in November to below 5% the typical mortgage rate on offer for a two-year deal has been around 5.5% since December while the five-year hovered at about 5.3%, according to financial information company Moneyfacts.

The market has come more in line with statements from one of the Bank’s rate-setting MPC members. Professor Alan Taylor on Wednesday made the case for four cuts in 2025.

His comments came after news of lower-than-expected inflation but before GDP data – the standard measure of an economy’s value and everything it produces – came in below forecasts after two months of contraction.

News of more cuts has boosted markets.

The cost of government borrowing came down, ending a bad run for Chancellor Rachel Reeves and the government.

State borrowing costs had risen to decade-long highs putting their handling of the economy under the microscope.

The prospect of more interest rate cuts also contributed to the benchmark UK stock index the FTSE 100 reaching a new intraday high, meaning a level never before seen during trading hours. A depressed pound below $1.22, also contributed to this rise.

Similarly, falling US government borrowing has reduced UK borrowing costs after US inflation figures came in as anticipated.