The latest UK auction for renewable energy contracts has secured long-term offshore wind power for as little as £37 per megawatt-hour, about an eighth of wholesale prices.
The government’s latest auction for long-term power contracts surprised naysayers to deliver further cost savings beyond the already low prices guaranteed at the last round in 2019.
As a result of the Department for Business, Energy and Industrial Strategy’s fourth contracts-for-difference auction, offshore wind power will now be delivered as cheaply as £37 per megawatt-hour, down from a bottom price of about £40 at the last round.
This was just a small margin above the clearing price for the round, one analyst told Proactive. The analyst at a major investment bank, who declined to be named, said forward prices for wholesale power are trading at around £300 per unit this year, driven mainly by wholesale gas price increases.
Amid the international squeeze on gas supplies, baseload power bought at peak times of day on the open market traded for as much as £301.69 today, for day-ahead energy sold on the N3EX market, according to figures from Nordpool.
Gas prices have skyrocketed this year due to tightening supplies, following widespread sanctions on Russian oil and gas following the war on Ukraine, but were trading for as little as £25 per unit after the Covid-19 pandemic, he explained.
In real terms, the price on offer from contracted offshore wind power secured in the latest round could rise in real terms. That is because the projects, which were quoted in 2012 prices and are not due to start delivering power for at least another four years, track inflation, the analyst said. In that time wholesale power prices could also drop.
Power producers competed in a sealed bid earlier this year to secure a guaranteed floor price (or 'strike') for their power projects, offering them stable revenues for up to 15 years. If wholesale prices drop below that benchmark, then power producers are paid a top-up amount, but conversely, if prices rise above the strike price then they are liable to pay some of that money back.
National Grid ESO estimates that the government’s auction rounds for long-term power contracts will deliver approximately £172mln of cost savings for offshore wind power due to be delivered from 2028 to 2029.
Winners from the latest auction for offshore wind power capacity include SDIC Power’s Red Rock Power Ltd, Iberdrola’s ScottishPower Renewables, Danish developers Vattenfall and Orsted, Engie and Portuguese utility EDP Energias Portugal’s renewable energy arm EDP Renewables. Hornsea 3 was the largest project to secure a “contract for difference” in the latest round, with a contract for approximately 2.85 GW of planned installed power capacity to be delivered by 2027.
The price of solar power, to be delivered from 2024, was higher on the face of it than the prices on offer from offshore wind. The government awarded more than sixty power contracts to solar photovoltaic projects for delivery, and one energy from waste project, at a price of £45.99. But given the impact of inflation, especially if gas prices fall in future, they may not in real terms be much more expensive to deliver than offshore wind, the analyst said.