UK subsidy shift could put offshore wind back on track

In this week's edition, offshore wind experts are bullish about UK reforms to subsidised power contracts. As Britain's annual offshore wind auction comes to a close, the government's changes could revitalise the sector after a tough few years...

Also below, the U.S. tightens tax credit rules for solar and wind and orders Orsted to halt an offshore wind project that is 80% complete. Meanwhile, data shows Southern U.S. is the leading growth area for commercial and industrial power demand as the data center frenzy continues.

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UK subsidy shift could put offshore wind back on track

Longer government-backed contracts are set to attract record interest in this year's offshore wind auction and could offset inflationary pressures from supply chain and market challenges.

Last month, the UK government extended the term of contracts for difference (CfDs) allocated to clean power developers from 15 years to 20 years in a bid to boost investor confidence and accelerate deployment.

The government launched the seventh annual auction for CfDs on August 7 and wants to accelerate clean power build after insufficient allocations in previous auctions set the UK back from ambitious carbon reduction targets.

Offshore wind developers have been plagued by high inflation and supply chain bottlenecks and no offshore wind developers bid in the auction in 2023 while last year the government secured 5.3 GW of capacity. The UK needs to procure at least 12 GW of offshore wind in auction rounds seven and eight to meet the lower end of its target of 43 to 50 GW capacity by 2030, according to RWE, an offshore wind developer with 10 active UK projects and nine in the pipeline.

CfDs offer a fixed strike price for clean power projects to reduce risks from wholesale price swings and the contracts have helped make the UK a leader in offshore wind.

Installed wind capacity in Europe (end of 2024)

Source: WindEurope

The longer tenors of 20 years will lower risks for investors while also stoking competition and incentivising developers to bid at their minimum viable price, the government said.

The government also increased the maximum bid price in the auction to account for rising costs and will offer subsidies to companies investing in the UK offshore wind supply chain through a new Clean Industry Bonus (CIB) with a budget of 544 million pounds ($733.0 million).

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The CfD reform will likely lead to a record amount of offshore wind bids in round seven, company executives said.

The changes will help to de-risk offshore wind projects and reduce costs, Damien Zachlod, Managing Director, EnBW Generation UK, told Reuters Events. EnBW is jointly developing 5.9 GW of UK offshore wind capacity with JERA Nex bp, a 50:50 joint venture between JERA Co. and bp.

“Longer CfDs provide greater revenue certainty [that] better reflects the asset lifetime, which is crucial for attracting the necessary capital," Zachlod said. Modern turbines are expected to operate well beyond 20 years, provided timely maintenance is conducted.

"With inflation having pushed up costs, securing the right strike price is even more vital,” he said.

Price pressures

For allocation round seven (AR7), the government increased the maximum strike price for fixed-bottom offshore wind by 11% to 113 pounds/MWh and hiked prices for floating wind by 10% to 271 pounds/MWh. Maximum prices for onshore wind rose 3% to 92 pounds/MWh while prices for solar were reduced by 12% to 75 pounds/MWh.

UK offshore wind auction results - strike prices, awarded capacity

Source: Offshore Renewable Energy Catapult

Despite higher maximum prices, the CfD reforms will likely boost competition and lower the cost of capital for renewable energy projects which could lead to lower clearing prices, Nick Hibberd, Policy Manager at industry group RenewableUK, said.

“Broader global trends, most notably the United States’ retreat from its renewable energy commitments, may also increase the pool of capital directed towards the UK market in this year’s auction," Hibberd told Reuters Events.

Bidding prices for offshore wind could also be affected by macroeconomic factors such as any changes to interest rates and yields on UK government bonds.

“The sector is also facing challenges such as increases in costs of raw materials like steel and rare earths, supply chain bottlenecks particularly around vessel availability, cables, switchgears and transformers, with increased demand across the world,” Hibberd said.

The application process closes on August 27 and results are expected in late 2025 or early 2026. Contract awards for wind projects will be announced separately from those for other technologies and offshore wind results will be published "as soon as possible," the government said.

Joined up support

While the CfD changes will help attract offshore wind investors, UK authorities must also increase the funds allocated to future auctions, enact policies that incentivise investment in the supply chain and help accelerate grid connection and planning approvals, to ensure projects can complete construction before the end of the decade, company executives said.

“We need to see a holistic package of measures including boosting our transmission networks and the way that wind farms connect, changes to planning regulations, and market reform that supports a net zero energy system,” Lisa Christie, Vattenfall’s Director of UK Public and Regulatory Affairs, said.

The government is rolling out many of these changes, Christie noted. In March, the UK introduced a new Planning & Infrastructure Bill in Parliament that is designed to streamline the approval process for large-scale infrastructure projects. GB Energy, a new state-owned renewable energy investment body launched by the government in May, has announced 1 billion pounds of direct investments to boost the offshore wind supply chain. GB Energy will also team up with Britain's Crown Estate to lease between 20 and 30 GW of new offshore wind capacity by the end of the decade, the government said last year.

Meanwhile, the UK’s National Grid plans to invest 35 billion pounds in grid infrastructure from 2026 to 2031 to connect 35 GW of new generation and storage capacity and create 26 GW in additional transmission capacity, while the National Energy System Operator (NESO) and energy regulator Ofgem are spearheading efforts to reduce grid connection times – which can take several years and reach up to 15 years in some cases – and studying reforms that could lower transmission network charges.

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“The grid connections reform process, which is currently underway, demonstrates the pace of change that can be achieved when government, industry and regulators work together with a focus on solutions,” Lucy Whitford, Managing Director for UK and Ireland, Development and Construction at renewable energy developer RES, said.

These reforms must translate into faster action on large projects that involve numerous stakeholders.

"Getting shovels in the ground to build the transmission infrastructure we need” remains a “significant barrier,” Whitford told Reuters Events.

Reporting by Eduardo Garcia

Editing by Robin Sayles

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