Energy Auction: wind power cheaper than gas

12th September 2017 | Commercial Energy

The UK Government awarded contracts worth £176m to 11 low-carbon electricity schemes, with offshore wind the big winner. These projects will generate nearly 3% of UK electricity demand. Two offshore wind schemes won contracts at record-lows of £57.50 per megawatt hour (MWh). This puts them among the cheapest new sources of electricity generation in the UK, joining onshore wind and solar, with all three cheaper than new gas, according to government projections.

The offshore wind schemes are also close to being subsidy-free: the Department for Business, Energy and Industrial Strategy (BEIS) expects wholesale power prices to average £53/MWh in the period from 2023 to 2035, covering the bulk of their 15-year contract period.

The auction results shift the conversation, from renewables being expensive, towards how cheap, variable zero-carbon power can be integrated into the grid, while maintaining sufficient supplies of power throughout the year.

Wind Power

The auction is the second competitive auction and third award of contracts for difference (CfDs). These are contracts at a fixed “strike price” and most of them last for 15 years. During the contract period, projects are paid the difference between a reference wholesale price and their strike price. If wholesale prices rise above the strike price, the project pays back the difference.

This guaranteed income allows developers to get more favourable terms from investors. This cuts the cost of borrowing, which makes up a large part of the total price tag for low-carbon generation. In the first round in 2014, the Government awarded 15-year CfDs to five offshore windfarms at £140-£150/MWh. These projects are coming online during 2017 and 2018. These awards were criticised by the National Audit Office, which said competitive auctions could have cut costs.

In the first CfD auction, held in 2015, contracts worth £315m were awarded to 27 schemes, with a total capacity of 2.1 gigawatts (GW). The majority of this was offshore wind, at prices of £120/MWh for projects coming online in 2017/18 and £114MWh for 2018/19. Onshore wind and solar schemes supported in this first auction came in at around £80/MWh.

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