U.K. Renewable Energy Auction Could Spell the End of Subsidies
The level of incentives needed is dropping after technology costs have plunged.
(Bloomberg) --
An auction this year designed to encourage more renewable energy in Britain will probably for the first time see a winning price for offshore wind at wholesale rates, according to a fund manager at Investec Plc.
Under Britain’s so-called “contracts for difference” program, generators get paid a fixed price, measured as the difference between the strike and a market reference. If the wholesale rate is at a higher level than the contract, generators pay the difference back, lowering costs for consumers.
Contracts in the U.K. forward market, which sets the price of electricity many months into the future, range from about 33 pounds ($42) a megawatt-hour to about 52 pounds, according to broker data compiled by Bloomberg. The level of incentives needed is dropping after technology costs have plunged.
The strike level will probably be “highly competitive with the wholesale price, as next generation multi-megawatt turbines are likely to be used which will significantly reduce costs,” said Deirdre Cooper, who helps oversee clean investments at Investec’s asset management division.
The next auction, which could start as early as this month, will see CFD subsidies capped at 65 million pounds to help pay for new renewable projects for delivery in the three years through 2025. In the most recent contest in 2017, the lowest guaranteed price for offshore wind was 57.50 pounds a megawatt-hour, half the rate achieved in the previous auction in 2015. That number looks set to fall even further when contracts are awarded later this year.
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“It is going to be lower than anything we’ve seen before in any of the previous auctions,” said Jonathan Cole, managing director of Iberdrola SA’s offshore wind business.
BloombergNEF’s global benchmark for offshore wind stands at $89/MWh, a 22% drop on the previous figure published in the second half of 2018. Denmark has the lowest offshore wind levelized cost of energy at $49/MWh, BNEF said.
--With assistance from Lisa Pham.
To contact the reporters on this story: Mathew Carr in London at m.carr@bloomberg.net;Jeremy Hodges in London at jhodges17@bloomberg.net
To contact the editors responsible for this story: Reed Landberg at landberg@bloomberg.net, Lars Paulsson, Andrew Reierson
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