This post was first published on BusinessGreen.
A week may be a long time in politics, but a decade is short in the world of infrastructure. The 180 months remaining between now and 2030 only get us to the early years of operation for the biggest rail or energy generation projects currently on the cards.
It helps to explain why the 2020s are looming large for the UK offshore wind industry. Companies make at-risk investments of hundreds of millions of pounds chartering vessels, carrying out surveys at sea and applying for consents for projects that take up to a decade to get to financial close. The return on projects being developed now won’t come in the next parliament, but in the three after that. This makes dealing with the short time horizons of politics particularly challenging.
Dramatic shakedown of the sector is causing turbulence
The government has acknowledged this by developing an ‘enduring regime’ for low carbon energy infrastructure through its reform of electricity markets. This has created 15 year cast iron contracts for successful offshore wind projects. Competition for these contracts has the added benefit of putting strong downward pressure on prices, which is vital if offshore wind is to play a big role in the UK energy mix in the next decade.
Unfortunately, it has also created a period of great turbulence for the sector, as up to 13GW of projects, in an advanced state of development, are chasing contracts which can support only a few small projects in this decade. The scale of the potential financial losses is causing soul searching for the businesses involved, but it also raises questions about how the UK can protect its options amidst a dramatic shakedown of the sector.
Green Alliance has looked beyond the current market difficulties and assessed the conditions necessary for successful cost reduction and growth over the next decade. Today we publish new research on the future of UK Offshore wind in the 2020s, the decade in which the heavy lifting for decarbonisation of the UK’s power sector has to take place.
Choices made in the next two years will have a major impact
Our conclusion is that policy choices made in the next couple of years will have a profound effect on the size and health of the sector in the 2020s because of the huge time lag between development and operation.
Our discussions with experts from inside and outside the industry revealed a familiar dilemma: costs need to come down but they can’t come down fast without incurring the cost of deployment at scale. In other words successful innovation requires investment in learning at sea rather than in the lab. This is understood by government but budgetary constraints have led to a lowering of deployment ambitions by a third whilst sticking to a cost reduction target of £100MW/h, which would have been challenging to deliver by 2020 even with the previous volume.
The danger of ‘wait and see’
The danger is that this could lead to the next government becoming stuck in a ‘wait and see’ approach, insisting that cost targets are met without giving the sector a fair chance of meeting them. Those of us that care about reviving UK manufacturing and power sector decarbonisation need to help them find a better way through. Offshore wind generation has already attracted £6.5 billion of investment in the three years since 2010, nearly three times more than into gas generation over the same period, making a big positive impact on the economies of former industrial areas such as Hull, Lowestoft and Tyneside.
The industrial and decarbonisation benefits of offshore wind can be achieved without going for the highest deployment rates, if government gives greater forward visibility for the market. Steady growth is far preferable to ‘boom and bust’, which wreaks havoc on the supply chain and leads to bottlenecks and higher costs.
A ‘Commit and review’ approach is best
Our analysis suggests that with a steady trajectory to 25GW of offshore wind the UK supply chain investment could be of the order of £1.8 billion a year for the next fifteen years. The Committee on Climate Change has made it clear that, even in a world of cheap nuclear or CCS power, this is the minimum offshore wind that the UK will need by to decarbonise its power sector by 2030.
We’ve concluded that a ‘commit and review’ approach would allow the UK to get the best of both worlds. The government would give confidence to offshore investors by committing to a minimum market size in the early 2020s, but protect consumers by locking in a review of the industry’s cost reduction performance before letting any contracts. These cost reduction targets will have to link to volumes of deployment and clear criteria for evaluation but, if the industry doesn’t meet them, the commitment can be rescinded.
Ensuring money is spent wisely to 2020
This approach would help the next government make some big budgetary and policy decisions in its first two years amidst considerable uncertainty. It has to set a decarbonisation target for 2030 without knowing whether nuclear, CCS or renewables will be the cheapest way of meeting it. It has to agree the next Levy Control Framework (2021-27) to give all technologies a market in which to compete, but with only a few years of cost data. And it has to ensure that it spends our money wisely on low carbon power contracts in the period to 2020.
By committing to a minimum volume of offshore wind it can keep an ‘all of the above’ energy policy alive, see which technologies emerge as the leading contenders and get an industrial return on the significant investments already made.
If the offshore wind sector comes good, we’ll have a new world leading industry in British waters, and the challenge of decarbonisation will seem a lot less daunting. Getting energy policy makers to think in decades rather than one year at a time is the first step to achieving this.