Wind of change: UK renewables auction secures record number of projects
The UK government’s sixth renewable energy auction has drawn strong interest from clean energy developers offering new opportunities for institutional investors
A total of 131 projects had been signed with developers indicating strong interest in offshore wind, solar and tidal.
The new deals could deliver some 3GW of solar energy, 3.5GW of new offshore wind capacity as well as an expansion of onshore wind. Just weeks after the UK government lifted the de-facto ban on onshore wind, some 27 new contracts for difference had been signed.
The successful sixth auction stands in sharp contrast to last year’s auction, where no renewable energy project could be agreed.
A key challenge had been the strike price, with the previous government having set the strike prike, the predetermined energy price which the producer receives.
The government said that a key reason for the turnaround was an uplift in government funding by 50% announced last month. But it also added that projects had been agreed at well below the upper limit on the price set for the auction indicating strong demand.
The ceiling strike price for this year’s auction has increased to £73 compared £44/MWh last year.
Energy Secretary Ed Miliband said: "We inherited a broken energy policy, including last year’s disastrous auction round which gave us no successful offshore wind projects.
"Today we have now achieved a record-setting round for enough renewable power for 11 million homes, essential to give energy security to families across the country. It is another significant step forward in our mission for clean power by 2030 – bringing Britain energy independence and lower bills for good" he emphasised.
Emma Pinchbeck, CEO of Energy UK described the auction as a great result and said that the prices achieved were a “massive surprise.”
“The return of onshore technologies is delightful and offers more routes to the government’s energy objectives at 2030. But in all models we need a lot of capacity - we will need to go faster than this.”
This was also echoed by James Alexander, CEO at UKSIF who said that the UK had turned a corner and that momentum behind the green transition was building: “The British public, especially energy bill payers, will reap the benefits of government, companies and investors working together to drive private finance into one of the UK's biggest future growth prospects: our clean power industries.”
But he also added that challenges remained: “The government must urgently turn its attention towards enabling technologies like battery storage, and building out the grid to enable more clean power to get where it is needed."
Share price boost for Ørsted
A key beneficiary of the new deals being signed is Ørsted which signed four major deals to develop Hornsea 3 and a further deal for the development of Hornsea 4.
Today’s auction result has been a boost for the Danish clean energy developer explained Tancrede Fulop, senior equity analyst at Morningstar. “In the 2022 round 4 CfD auctions, Ørsted secured a low GBP 37.4/MWh strike price (in 2012 prices) for Hornsea 3. However, due to rising interest rates and construction costs plaguing the offshore wind industry, achieving a higher price by resubmitting part of the project became crucial for Ørsted. By 2027, when Ørsted aims to commission the project, the weighted average strike price of Hornsea 3 is estimated to be GBP 59/MWh, compared to our previous estimate of GBP 52/MWh, which did not account for success in these auctions.”
Indeed, Ørsted’s share price jumped by more than 7% in the wake of the announcement, a welcome turnaround from the past five years, when its share price dropped by more than 40%.
The successful auction increases the pipeline of clean energy projects for institutions targeting the UK. Earlier Hornsea developments have been backed among others by DC Master Trust Nest and LGPS infrastructure platform GLIL.
But Sam Hollister, head of Economics, Policy and Investment at LCP Delta warned that a drastic scale up in clean energy was still needed with the UK remaining well below its target of 55GW of offshore wind by 2030.
"Based on current timelines to bring projects on stream, next year’s AR7 and the following AR8 auction would each need to procure around 14GW of offshore wind (28GW in total). We are yet to see how impactful the recent partnership announcement with the Crown Estate will be on cutting the planning process for projects, which could give the government an additional CfD auction to meet its target" he said.
Tailwinds: are UK investors finding new opportunities onshore?
