Perhaps wind in the UK isn't such a busted flush after all. Britain's government has significantly improved the terms for the following year's bidding round, two months after it endured the humiliation of having no developers bid in its most recent offshore power subsidy auction. That will guarantee bidders, but because of the postponement, the government could need to hold extra-large auctions in order to meet its net-zero goals.
Under its globally committed objective to reduce domestic emissions by 68% by 2030 compared to 1990 levels, the UK's power industry must reduce its carbon dioxide emissions from 54 million tons in 2023 to approximately 15 million tons just seven years later. Due in large part to the size of offshore wind projects, it was extremely worrying that no one bid to add capacity during September's Allocation Round 5 and that Sweden's Vattenfall withdrew from a North Sea program on which it had already begun construction in July.
The primary issue was that, in 2012, the subsidies limited the amount of electricity that bidders could charge for each megawatt hour (MWh). Taking into account headaches such as a 30% increase in wind turbine prices, Jefferies estimated that developers would only receive an unlevered internal rate of return of about 7%, which is approximately equivalent to their weighted average capital costs.
The British government is now seeing the issue and, at the very least, not taking any drastic action. A 66% increase in the highest permitted electricity price to 73 pounds per MWh in 2012 pricing pushes the internal rate of return up to 10%, according to Jefferies projections, which is consistent with what wind players like Denmark's Orsted demand. There are going to be bids, even though the price may decrease during the auction process. However, since gas costs are skyrocketing and Britons are already paying more for their power, this will make things worse. For a period of two years, the UK's weekly average of electricity forward delivery contracts has surpassed 100 pounds a megawatt hour, according to the Grantham Research Institute.
However, there is a drawback to the recent inaction. By 2030, the UK will require 50 gigawatts (GW) of offshore wind, compared to the current 14 GW finished and the roughly 13 GW under development. Up to 27 GW must be put up for auction, granted permission, and constructed as quickly as possible because developers may withdraw from a maximum of 4 GW of ongoing projects owing to poor returns. Consultant LCPDelta estimates that 12 GW, significantly more than past quantities, will be required in the following two auctions, with a correspondingly larger subsidy bill. That being said, British politicians are unlikely to make the same mistake twice.