The results of the yesterday’s government auction for renewables procurement has taken the entire energy sector by surprise. Clearing 860 MW at £75/MWh in 2021 and 2.3 GW at £57/MWh in 2022, it revealed that the cost of offshore wind has dropped by 65 per cent in under five years. This result comes close on the heels of a report from Renewable UK, highlighting that the UK’s offshore wind industry has now increased its domestic content to 48 per cent and is in the process is providing almost 20,000 direct and indirect jobs. Heavy investment during the industry’s nascent years has yielded tremendous results and the UK can confidently stake its claim to be the global leader in offshore wind.
A new energy cost benchmark
The cost reduction is reflective of only three offshore wind projects but, nonetheless, it sets a new benchmark for alternative technologies. Onshore wind and solar are already cheaper than gas plants, so renewable energy will definitely be the cheapest source of energy for the UK in the 2020s. Policy makers should be taking advantage of this seminal moment and investing further in renewables, not only to ensure they meet the targets set by the fifth carbon budget, but also to bag a bargain.
Our new analysis of the market, based on Monday’s auction results, shows that the UK has already committed 95 per cent of the money needed to meet its climate goals under the power sector by 2025 (ie additional low carbon generation of 90 TWh).
However, despite yesterday’s good news, we are still in the midst of a renewables policy freeze, in place since 2015, under which onshore wind has been banned, solar auctions have been curtailed and energy efficiency measures have slowed. A rapid thaw is needed soon, the government can allocate the final five per cent it needs to spend to meet its climate targets (roughly £0.6 billion) to avoid the clean power gap that the Committee on Climate Change (CCC) warned of in its recent progress report.
Forward visibility for continued wind farm development in the UK will help to drive competition and bring costs down. We propose that the government should, therefore, allocate the remainder of the £730 million it committed in 2016, through more auction rounds, by 2020.
By 2025, beyond the recent auction period, a further 6-7 GW of offshore wind, 2-3 GW of onshore wind and 7.5 GW of solar should be deployed. Policy makers should be ensuring they can reap the benefits of falling costs. This week’s auction results also revealed that only 60 per cent of the £290 million available was allocated for offshore wind, raising the question of whether the remaining 40 per cent will be deferred to future budget allocations.
We still risk spending too much on nuclear
Our analysis highlights the risk of investing heavily in nuclear energy. Under current government plans, spending on nuclear power will be over twice that spent on all renewables by 2030, even though renewables can provide power at a much lower price. The CCC says we should have low carbon generation of up to 180 TWh in the 2020s and we show that more nuclear capacity is unnecessary, the UK can meet its power sector carbon budgets with only Hinkley C. For any new nuclear plants to be able to compete in the market with offshore wind, they will need to strike a price of £65/MWh or less, which is 30 per cent less than the current £92.5/MWh (and rising) price for Hinkley.
A high renewables future needs a highly flexible energy system. Current nuclear designs cannot operate flexibly, which makes them vulnerable to lower cost renewable competition. If the government wants to invest in nuclear in future, it should make sure it can be both cheap and flexible.
The energy sector is undergoing a fundamental shift towards more distributed, low carbon, flexible generation sources. Cheap renewables will increasingly shape the space for other power sources. As the results of the auction sink in, the government will have to rethink its energy strategy going forward. The auction mechanism has delivered its aim of bringing costs down and this should be continued. A smart strategy would be to rekindle the supportive policy that helped us get to this point and buy more cheap, clean energy for the future. This would keep consumers happy and support even more new jobs in a growing industry across the country.